Jan, thank you for the additional information.
It does sound like there is a lot going on in your daughter's life. If she is refusing to get help, then what your son in law was told is right. There is little you can do to force someone to get help, unless they threaten to hurt themselves or someone else. It is only then that they can be involuntarily committed. This is how the laws were set up to protect people from committing others for any reason except emergency related ones.
I think it's wonderful you are so involved with your grandchildren. You are a stabilizing force in their lives and they need it with all that is going on in their home. As I suggested before, talk with them and let them know you are there for them. Be careful to stick to being supportive. You don't want to say anything that their mother may feel is against her. Also allow the children to talk to you. They need someway to vent their feelings.
It would be ideal if the children could see a therapist. But if not, the support you and other family members offer will help. Children are resilient and if they have people to care for them and love them, they will respond to that support.
Contact the police and ask about the man your daughter is having the affair with. See if there is any way you can find out if he has a criminal history (most of this information is public). If he has ever been convicted of a crime, he may have a probation or parole officer, so you could also speak with them about your concerns. He may have been ordered to stay away from children if he has ever been convicted of a crime involving children. At the very least, let the police know you are concerned.
You could also contact your local Children and youth protection office. You do not have to tell them your name, but you could ask what you are allowed to do in this situation. They will be able to tell you how to handle this and protect the children.
Has your son in law considered leaving the situation and filing for custody of the children? He could talk with an attorney and let them know about his wife's behavior to see what kinds of actions he could take. I know this an extreme action, but if the children are being exposed to a possible pedophile and are being emotionally abused, your son in law needs to protect the kids at all cost.
It might also be a good idea to seek out counseling for yourself and anyone else involved. Counseling can help you cope with the stress of the situation and give you an outlet, as well as someone to help you see ways to handle this problem objectively. Consider it, especially if things continue the same or get worse. You can search for a therapist by looking on line at http://therapists.psychologytoday.com/rms/. Maybe once your daughter sees you getting help, she may consider it as well.