Your mother-in-law is missing the chance to be in a loving relationship with three more children. What a loss for her! My guess is that she isn’t going to listen to you. But she may listen to her son. He has embraced all of these kids as his own (as have you). He needs to protect them all as well. That means having a difficult conversation with his mother about treating all of his kids as her grandchildren, regardless of bloodlines. None of his kids is “just” anything. To love him as her son means to respect his choice, to love the children he loves, and to respect you as his wife. I hope your husband can enlist his father’s support as well.
If she won’t or can’t change, it’s important that you and your husband to talk with the children. Kids, even middle school kids, usually accept the judgments of older people in their family. Make sure they understand there isn’t anything wrong with them and that it is grandma’s loss that she can’t see them for the wonderful children they are. Make sure they understand that in your eyes how people come into the family doesn’t matter. Family is a way of feeling, not a function of genetics.
Unless and until she changes her attitude and behavior, I don’t think it wise to leave the kids in her care. The kids certainly see the unequal treatment. It’s to their credit that they stood up for one another. But they are too young to be expected to just let her unequal treatment roll off them. It’s enough that they learn to be polite around her. It’s potentially damaging to their self-esteem and their relationships with each other to ask them to accept her as an authority figure in their lives.
I wish you well.