I agree with you telling her you can't visit as long as the dog is there. If she's already been told to get the dog some training and hasn't done it, I don't expect she ever will. As for the husband, would he rather come home in the middle of a lawsuit because this dog has caused serious damage to some other child or person...so far they have been lucky nobody has sued them, their luck won't always hold up.
If I had to choose between my childrens' safety or a friendship, my kids would be my first priority and a true friend would understand this.