You and your husband and your kids are your own family now, and that family has to come first. Your husband's two kids are older now, and you should invite them into the discussion because they will be adults soon and need to see how adults should be handling these things. Explain the situation to them, and ask how they would feel about limiting contact with your in-laws, or even moving away.

Get caller ID and stop taking their calls. If you don't think simply not answering the phone will be enough, then write a nice long letter, (everyone should be involved in writing this) explaining that your family (you, your husband, and your children) has to come first, and since your in-laws can't respect that, they can longer be apart of your lives. Then stop the contact. You don't want that kind of poison behavior infecting your children.

I had a problem with my in-laws (specifically my husband's mom and step-father) and we simply do not speak to each other. His mother, under the influence of his step-father, tried to be very controlling of our lives, even trying to decide our wedding date and what sort of job my husband should have. My husband will occasionally have brief conversations with his mother, but they "stick to the weather," as it were. We don't speak to the step-father at all (we politely ignored each other at a local fair we all happened to be at) and we've made it clear that he is not welcome in our home.

Of course, it helps that we live on the opposite side of the country now.