I know what you are saying. I dealt with this this past weekend....and posted nearly the same sort of question. We gave gifts, but the price difference between our gifts and their's were huge. I felt I needed to "gift again" to make up the difference. The awesome ladies on here made me realize that I shouldn't do that. She gives because she wants to. She knows you are not buying for her kids. If she still chooses to do it, that is HER CHOICE.
If you feel out of sorts about it (and I would to....just my nature), find something you can make inexpensively to give them. I love things that are handmade and/or personal.
*baked goodies for the family to enjoy
*cookies in a jar - looks nice and they can make as a family much later when the rest of the goodies run out.
*I make a personalized calendar of the entire side of the family. I put pictures of the people who have birthdays on the top and put in the person's name in the box with the date. Snapfish now has a great way to do this....and they have lots of sales. I got my calendars for $10 a piece after shipping. I had to buy 3 to get that price....maybe one for you, one for her, and one for the related parents? I make 6 for his side and 6 for my side. I keep one of each.
*A family photo put in a frame for them
*Personalized ornaments - on Snapfish you can put photos on the ornaments....maybe one of their family, or her boys together... do you have pictures?
*A craft project that her sons can make together?
OR --- have the candid conversation that you prefer NOT to exchange gifts with them. Maybe have a white elephant gift exchange instead?
Plan a date in the spring or summer to go somewhere fun and enjoy each other's company instead of exchanging gifts now?
For my side, we have 9 kids total. We've decided to have them decorate Christmas boxes at our get together on Christmas Eve and us 3 moms are buying dollar store trinkets to fill the boxes with. There will be a multitude of things to play with and if they get lost or broken....oh, well. It will make the time fun together, the kids will get stuff (that is equal), and will have something to play with while we are together. Our budget was $30 each mom.....but I think it is somewhere around $20.
Good luck!