Ladysledge: I really do think that the MIL/DIL relationship is fraught with danger and can be a tough cookie to crack. It is an un-natural relationship right from the start because it is another hugely important female role-model in your life that is not your Mum. And so with that comes issues of control, manipulation, defensiveness, judgement, etc.
Then when you throw grandchildren into the mix it takes on a whole other level!
I think initially I felt quite sad at how the relationship I had with my MIL completely changed once DH and I had children. It was like she wasn't interested in me as a person anymore. Everything revolved around DD, all conversation, any visits, all about her. It was like I just stopped being a person in my own right to MIL anymore and I existed purely as mother to her Grandchild. That took a lot of getting used to.
But also there is such an element of both MIL and DIL feeling around in the dark, trying to reach some common ground, not wanting to upset the other one or step on the others toes. You just don't get that with your own mother, or at least I didn't. I felt like MIL was judging my capabilities as a mother. But in hindsight it was just her not knowing what to say or do to me and me being over-sensitive and paranoid about what she was saying to me.
You just have to feel your way through it and come out the other side. Having another child does make it easier I think. Because you have both been there before and are both a little bit more knowledgeable.
Good luck, I am sure it will get better!