Can't help you to understand her behavior, but, something similar happened to me, minus the "religious" part. I find trying to answer my children's questions about grandma's behavior the most difficult part, although as they've gotten older, it's gotten easier. Kids will most often grow to see past any superficiality - they know who's always there for them.
I'm especially sorry to hear about her testifying against you in court - I know that had (and still has to) hurt. I give you credit for not letting it stop you from going to the kids' games. I'm assuming everyone's behavior is at least civil, and that the kids are the focus. If it helps, I guess you could always think of it as, "At least they're getting exposure to all sorts of different people who love them."
Just to consider, how are the kids doing after all of this? (I know custody battles can be h*** long after the court has ruled.) How is the relationship between your mom and your kids? Between them and their dad, and the new step-parents? Would it be helpful to you (and/or your kids & husband) to talk to a counselor or therapist? You know you can't change anyone else's behavior, but if you can find a way to get support and to come to terms with some very stressful situations, I should think it could only help. Beating your head against a brick wall (trying to figure out why your mother does the things she does; continually giving energy to fighting the control issues with her) only gives you a hard head - I'm proof of that. :-)
Best of luck to all of you.