All I can say is WOW! How can some people be so cruel?
I know that in my situation, I have made it very clear to my entire family (luckily I don't have to deal with the in-laws anymore because I am divorced!) that these children are to be treated as if they were biological family and if my family members could not abide by my wishes, then they would not be welcome in my home and I would not bring the childen over theirs. Thats that! As far as I am concerned my foster children have had enough neglect and rejection in their little lives and I will not allow them to be subjected to it while they are with me.
I think your approach with your friend is exactly what I would have done. As far as your mother-in-law is concerned, I would put my foot down as well and say you will not tolerate it. That is just my opinion though, maybe others here will have a different take on it. You have been entrusted to protect these children physically and emotionally. I can tell by what you have written that you take this seriously and I applaud you for it.
My pre-adoptive daughter, who is moving in with me this Friday
is coming from a foster home who treated her like nothing more than a boarder who paid rent to live there. The foster mother didn't even acknowledge this child's birthday and her Xmas presents were always used toys from a flea market but the bio-daughter was treated like a princess.