I would like to find out how this situation would work.
In 1996 my husband applied for a visa/green card for his then
unmarried sister who lives in India. Since then she married and has
two children. During the past few years, we never had any update on
the status of her application. However, we just got a letter from INS
asking for $70 for the affadivit support fee. I assume that the visa
may be close to becoming a reality.

MY QUESTION IS: Would her spouse and two children also be entitled to
come to the US too with her or would she have to come here first and
then apply for them? How is a situation like this worked... where
circumstances have changed since the original application.

All help is appreciated. Is there anywhere on the INS site that I can
find info pertaining to this kind of situation?

Thanks

A few more years to go at least:

http://travel.state.gov/visa/frvi/bulletin...letin_2847.html

http://uscis.gov/graphics/howdoi/sibapp.htm

Yeah, your husband's sister visa number is close to becoming available.
And yes, your husband's sister spouse and her children are eligible to come to the US based on her visa. No need for separate petitions for them. Good luck.