I thought you might want an update to my situation, especially since I was pregnant and having many issues last time I update. My SD did indeed move out, but she moved back in soon after due to problems following mom's rules. I don't quite recall where I left off, but I had a frank talk with my DH, told him his relationship with SD was inappropriate, bordered on emotional incest if it wasn't already, and that at times I suspected they were over the line physically. he was so angry and reacted so strongly that I thought he would leave (and I was prepared to tell him to leave, if things didn't change). He followed my suggestion and we talked to a counselor together, and he did not deny all the incidents I wrote up here, and in fact defended them.
The counselor was quick to point out that taking one's child to Victoria's Secret, taking her on expensive dates weekly, and backrubs in the bathtub/in child's bed are not appropriate. She also pointed out that SD's insistence on alone time was beyond the normal need for time with a parent, especially when that alone time was demanded even as I was in the hospital bleeding and pregnant. She set out some guidelines for us both to follow as well as some boundaries for DH to inforce with SD.
SD rebelled immediately. She moved out, and I breathed a sigh of relief, especially after I discovered pot in her bedroom and had the police come to take that away.
However, after she moved out SD ramped up her attempts at "alone time" to the point that even DH got uncomfortable. Social services were involved already, with SD's mom's alcohol abuse issues, so we began to have family counseling through them. SD refused to attend if I was there, and at that point DH began to realize that SD was controlling everyone, including him.
Baby was born healthy (yay!)and Sd has seen him only once. She continues to demand alone time, but DH won't give in. He is in therapy himself finally and is learning boundaries and some better parenting techniques. He is now very open with me about his talks with Sd as the counselor advised. Now, there isn't much test to that since SD refuses to speak to him other than to demand alone time. She will in fact pick up the phone and then hang up on him without speaking so he can't even leave voice mails for her. She's also cut off most of Dh's side of the family after they "dared" to accept her half brother, and tried to get her to behave like a normal kid about the new baby. She did recently try to call DH, totally out of the blue, to manipulate him by saying that her friend's dad had asked her friend to go play catch and that made her miss DH and want to hang out with him. Her suggestion for hang out time? Not catch with dad, but that dad could take her "just me and you dad" to the newest fancy restaurant in town, after going with her to pick out a dress and get her nails done. Amazingly DH told SD he loves her, and hopes she can come be a part of our family, have brunch with us, spend time with her new brother, etc, and that if she could behave appropriately that some day they could have appropriate father-daughter alone time, but it would never be like a date, and it would never be specifically to exclude me or anyone else. She hung up on him when she heard the baby squeal. She is really that unbalanced that even HEARING the baby in the background is too much for her.

So, that's the news here. I am cautiously optimistic that my husband may be a good dad after all, but I have my eyes always on it. I am not at all planning to allow SD back in our home for any real length of time but I would like her to get some help (she is refusing to speak to a therapist now) and eventually have a NORMAL relationship with her dad and her new brother. I don't see either happening until she is an adult, sadly, if ever. She was so used to being in control, and Dh was so used to being a total idiot and also to being inappropriately attached to her, that it may not be "fixable." If I am honest he is still somewhat on a probation with me, because I won't let myself or my kids ever be abused or exposed to such gross behavior again, and if SD were ever to live here again I would install cameras as recommended. I don't THINK anything physical ever happened, but if there were any chance that it might, I would be vigilant.

So, that's the update on this sad, sick situation, if anyone remembers it.