Callie,
I still have a relationship with my exh's family but I can also say that they NEVER and I mean NEVER gave me any grief about my boundaries. They always supported me 100%. If they hadn't, I don't think I would have maintained a R with them. Honestly. There are alot of losses when it comes to addiction. When we have a child with the addict, sometimes the loss comes in the form of lost contact with his side of the family. Your EX is the link between your kids and his mom. Not you. Your MIL is doing your ex's bidding. He's locked up and she's stepped in to push against the boundaries he can't. The thing is...this man is your ex. And so is she. And if she cannot have civil conversations with you and respect your boundaries, the ONLY way your going to get out of the loop is to stop engaging with her.
I would lay out my boundaries and if she didn't respect them, I'd go no contact. Its not about punishing her. Its not about taking anything from your kids. Its about getting and maintaining peace in your life. She can only steal your peace if you let her.
Hang in there...