Betti

Yes, if the I-94 is expired and she doesn't have a pending I-485 or green card, then she's in the country illegally.
When USCIS accepts an I-485 then the intending immigrant is in a period of authorized stay. It doesn't change their status - she'd still be out of status if her I-94 had expired - but she wouldn't be in the US illegally. She'd have permission from USCIS to be here.
If USCIS rejects the I-485 and returns it then they never actually accepted it, which means no period of authorized stay has been granted.
If USCIS accepts the I-485 and subsequently denies it, then the period of authorized stay ends on the day the I-485 was denied.
None of this stuff changes her eligibility to adjust status. An immediate relative of a US citizen does not need to have current non-immigrant status in order to adjust status. Even a denied I-485 wouldn't change this unless it was denied with prejudice, meaning they found her ineligible to adjust status. Most of the time, when an I-485 is denied for a K1 it's usually without prejudice because of a failure to submit the required documents or evidence, or not showing up for an appointment with USCIS.
Marriage doesn't change the expiration date of the I-94. However, for a K1 visa holder the marriage does make them eligible to adjust status. If her status expires, and she isn't in a period of authorized stay because of a pending I-485, then she could get harassed by CBP or ICE if she happens to have an encounter with them. However, DHS policy is not to initiate removal proceedings against someone who is eligible to adjust status. Still, getting jacked around by CBP or ICE, and potentially spending a day or two in an immigration holding cell, is not a pleasant experience. Avoid international terminals or border checkpoints unless she's got documents to show she has permission to be here.

The telling your kids excuse might be good for a week or a month but 2 years ? It looks like she married him to let him stay in the US and then they each went about their separate lives. I would suggest heading to immigrate2us.net as they specialize in problematic cases and your friend is looking like he won't be staying unless there is a bundle of evidence like family vacation pictures we don't know about. Good luck

If you think that USCIS wouldn't find out then you need to do a lot more research than you have yet done into US immigration processes.
Just to clear up some issues:
You apply to sponsor a fiancee to the US. USCIS investigates to make sure you are qualified to sponsor a fiancee. If you are, your petition is approved. The process then moves overseas to your fiancee' home country. The Department of State which oversees consulates now investigate whether she is eligible to receive a K-1 visa. She provides them with detailed information about who she is, where she lives and works, and her marital status. They will investigate with a fine tooth comb all aspects of her situation, her background, and your relationship looking for evidence of fraud. They ensure that you have followed proper cultural procedures/rituals and have the evidence to prove it. They run security and criminal checks. Some countries also require additional processing which can include 'home visits' and contacting family members to ask them about the relationship. You will both state in writing that you are free to marry and intend to marry when she arrives in the US and sign these documents. If you lie about this, then the lie will be discovered - and it will be discovered - sooner or later. If sooner, then she will be denied the visa. If later then several things may happen.
For instance, if she gets a K-1 visa, then you marry before she arrives in the US, she is no longer eligible to enter the US on the fiance visa as she is no longer a fiance. If she tries to use the K-1 visa and lies at the POE that she is not married, she has then committed misrepresentation - one of the biggest 'crimes' as far as USCIS is concerned. Her arrival to the US is only valid for 90 days. She needs to request permission to remain in the US by applying to change her status from non-immigrant fiancee to permanent resident. Part of this application includes the marriage certificate - the date of which needs to be after her entry to the US - and further proof of the relationship. Once again your relationship is put under a fine tooth comb and may involve another interview. If she was married before she entered, it is likely to be discovered. She will be guilty of several counts of misrepresentation which will lead to detainment by USCIS, deportation and a life time ban on ever being allowed to enter the US.
If the fraud is not discovered at the AOS stage, then 2 years later your relationship is once again put under the microscope when she applies to remove the conditions of her two year card - oh yes, she is only allowed to be in the US for 2 years before she has to prove the validity of your marriage once again. There are more security checks and the possibility of another interview.
Even if it is not discovered now, there is no statute of limitation on immigration fraud. Anytime in her whole life it can be discovered that she did not get married in the US but was married before she came and used a K-1 visa knowingly and fraudulently - leading to detention, deportation and a life time ban.
Seriously, if you love this woman you will NOT subject her to any sort of illegal immigration activity. The news media are filled with tragic stories of families being torn apart because one member has committed some sort of illegal immigration activity and has been banned from the US. There is a fairly recent story of a US citizen who did exactly what you are proposing with his Japanese wife. It was discovered 2 years later after they already had a family. They have spent the last few years apart fighting to try and find some sort of loophole to allow his wife to re-enter the US. Their claim that their family wanted to see her married before she left Japan held no water with USCIS. She was guilty of immigration fraud and is now banned for life while she and her family are suffering the consequences of her misrepresentation.
If you do not have the time and the money to do it properly, then you need to re-think your situation. It will be a lot more time-consuming, expensive and heart-rending to be commit immigration fraud because you don't see how USCIS would ever know. It is USCIS's business to know. Uncovering immigration fraud is their bread and butter.
On another issue, it is also a violation of the Terms of Service for Visa Journey to commit or to condone any sort of illegal immigration activity. I have left your post rather than removing it as I feel you need to be advised about the degree of danger your suggested course of action holds for someone you are supposed to love. Don't be so selfish. If she cannot leave her home unmarried, then you need to get married and file for the correct visa for her to come to the US. That is your only real course of action.

Hahaha, great topic. I would have sworn it was started by a German when I read the title.
I agree completely, American bread sucks. I tried to make a good wheat bread myself, but couldn't find the right flour. Why are there not any good breads available in grocery stores? Someone could make a fortune by selling it.
Thanks for the recipe-link, Booby, I'll have to try that!

Here is the problem. Your husband lied to government official in the past. Now, you mat condier it a harmless lie, and it may well be a harmless lie. He got a visitor visa by lying. He returned (I assume) and you later did a K-1. correct? And now you are doing an adjustment of status. OK.
Your husband is not entitled to a green card. He, and you, have to meet certain requirements. USCIS is charged with determining that you meet those requirements. There are basically no rules on what they can ask you. The questions about sex are simply good ones to ask people claiming to be in a marriage relationship to verify it is a marriage relationship.
Your previous actions have doomed you to being looked at with a magnifying glass. Deal with it. You will probably be approved but they had to do what they had to do, because of what you did previously.

Wowza, I didn't know that this is such a sensible topic. Thought I'd share a good laugh, sorry if you are offended by the blog. No need to get your panties in a knot though, just don't read it.

Hahaha, great topic. I would have sworn it was started by a German when I read the title.
I agree completely, American bread sucks. I tried to make a good wheat bread myself, but couldn't find the right flour. Why are there not any good breads available in grocery stores? Someone could make a fortune by selling it.
Thanks for the recipe-link, Booby, I'll have to try that!