。
She was sitting surrounded by her grandchildren.
Literal
She [topic-は] grandchildren [by-に] being-surrounded was-sitting.
囲まれて is the te-form of the passive 囲まれる ('be surrounded'), used adverbially — 'surrounded by [grandchildren], [she] was sitting.' The agent of 囲む ('surround') is marked by に — 孫達に囲まれて. The whole structure paints a tableau: a beloved grandparent with adoring grandchildren in attendance. 座っていた is the past resultative — 'was [in the state of] sitting.'