honestly it sounds like the kids need to be taken away...
This is a person who should not breed in the first place... and I use the word "breed" because she's popping them out like puppies-- and handing out the older son but not the older daughter? Because of childcare? Dear Lord, someone get this woman a tubal ligation!
there's too many warning signs-- especially considering the guy flashes to get attention from females--- and the mom stays with this guy because of her own screwed up issues. If you need any more encouragement, read 'Bastard out of Carolina' to read about daughters, a stepfather, and a mom who enables the stepfather.
if your friend is that worried, then she needs to switch rooms with the child for awhile...but honestly it sounds like your friend is as bad as the step father. she may not be sexually abusing them but she's enabling the abuser the SECOND she thinks something is wrong.
and while the children do become wards of the state-- there's a good chance, I think of you being able to adopt them.