Hi - I would like to be of some assistance, if possible. It sounds like your situation is difficult to say the least and that you are hurting. For that, I am sorry.
What you're describing sounds like a global personality change from the way she was several years prior (I am assuming you had a good relationship before). There are several possibilities for this:
1) drug use - several drugs of abuse can cause extreme paranoia and overall personality changes.
2) physiological conditions - physical changes in the brain due to trauma or illness (a tumor, for instance) can cause paranoia and personality shifts.
3) mental illness - Paranoid Personality Disorder is something that could apply, as could Delusional Disorder (nonbizarre type), etc.
I'm leaning away from Paranoid Personality Disorder or a personality disorder of any type because these are developed from childhood on. She would always have exhibited some symptoms of paranoia or narcissism. It wouldn't start at age 36 or so.
This leaves something like Delusional Disorder (nonbizarre type) or something in that vein.
Whatever the cause though, is there anything that you can do to salvage your relationship with the grandkids (possibly through your son-in-law)? How is your relationship with him?
Gosh, I'm terribly sorry that there isn't someone who is a part of her inner circle that is willing to go the extra mile and try to make some headway with her. It probably ends up being very painful for everyone involved. My sense is that she will eventually alienate this husband and possibly her own children as time goes on. Holding steady in your love for the grandkids (even if you can't see them for now) will help in developing a relationship with them in the future. You might even consider writing a little journal to them on important dates (birthdays, etc) telling them what you have observed about them and their lives and how much you love them. I knew a biological mother who did this for her daughter who was adopted out. She kept entries on the holidays and birthdays for 18 years. When the daughter became an adult, she was able to give it to her. I can't tell you how much it meant to both of them. The mother could finally feel heard and the child felt loved even after all that time apart. Of course, there was a lot of waiting involved, but in the end they were able to create their own special bond. Maybe you can do the same.
I wish you the best of luck and pray that time will heal the wounds that have already been created.