Thanks for all of the great comments and ideas from this post. Hubs called them up yesterday and we have pretty much come to an agreement, that I am not entirely thrilled about, but not entirely unthrilled about either.
They have decided to go along with letting Bailey wear underwear, even during naps as long as I provide a waterproof pad that if he has an accident I am responsible for washing. Fine with me.
Until Bailey feels comfortable enough to tell the teacher when he has to go to the potty, he will wear a pull-up when they go the park. Not so fine with me.
So, now, the ball is in my court and I guess I have to move all things potty to the bathroom and encourage him to tell me when he needs to go instead of having the potty in the living room and Bailey just going when he needs to.
He is still a little shy about using the potty and only wants me to help him. He won't even let Daddy help him. Tonight he is going to stay with Gramma and I hope he feels comfortable enough to tell her and let her help. One step at a time, I suppose.