Sorry to hear about the situation... It's always tougher with kids involved. I can make some general comments about it, not knowing all the specifics (i.e., talking to her myself). Usually, I recommend either euthanasia, adoption to a different home, rescue groups, or doing behavior modification. Behavior modification is (in my experience) hit-or-miss. Most owners don't feel right about adopting out a potentially dangerous dog. Rescue groups are sometimes very selective about the cases they take. That doesn't leave a lot of room if the preceeding situations apply.
My take on this is that your sister can't take the risk of having this dog around for multiple reasons... no matter what the cause is. I like animals, but I like people more. Here's a list of things that I've seen happen to people who have animals like hers:
Injuries to kids, visitors, and neighbors
Lawsuits
Loss of homeowner's insurance
Lingering guilt
Now, recognizing that all people are different in their thoughts about how to proceed, here's what I would suggest they do if they want to pursue any type of investigation for a cause or behavior modification:
Go to their vet. Get a physical/neurological examination. Give a thorough history. Make sure the Rabies vaccine is current. Get a complete blood count, profile, T4, and electrolytes.
If everything here is O.K., you need to get in touch with a board certified behaviorist (major Universities witha vet school usually have one).
Let me know if I can help or answer any other questions.
-Hobbit