Okay I finally read the article that Craig posted above and man was it awesome. It essentially breaks down the films and focuses on just the arc involving the girls and the demon Toby. These films are delving into nasty piece of business and have managed to establish it's own mythology while playing around with horror tropes and paranormal legends and clichés (not the term I wanted to use but I suppose it will do until someone is able to come up with another one). which is why I'm a big fan of the movies.
Now then spoilers will follow in this post...I believe that the grandmother took the girls upstairs to perform some kind of brainwashing or conditioning ritual. This is why both the girls memories of this incident are erratic and incomplete. Hunter I believe is the key element into freeing Katie of what has been done to both of them. Ali I think should be set up as the heroine of the fourth film since she is from another family entirely. She's not prone to the demon pact Lois and her witches have made with Toby. I think "Paranormal Activity 4" needs to focus on Ali researching ways to stop Toby and break the pact and cultivate allies at the same time saving her sister from Toby's possession.
The thing is though if Oren Peli and whoever writers this next movie wanted to...it could end tragically instead of heroically. Peli stated that he made the first film because he was inspired by things that scared him as a child. I happen to think these films aren't meant to end with a happy ending. Katie could be killed as well...and Hunter saved by Ali. I really don't know how to resolve this particular plot point but it does need to be resolved and I will be personally upset if they do not resolve it.