I was going to suggest a scrapbook as some of the others have, but another idea is a keepsake quilt. You can buy special fabric (at jo-anns) that you can print pictures on (using your regular printer), and put them on the quilt. I made one of these for my grandmother and my sister when my dad passed away. I used his t-shirts, jeans and bandanas for the other material. It also had patches of his accomplishments and hobbies (he was a medic and active member of a motorcycle club). The pictures were all of his siblings and kids, when we were small and special moments like walking his daughters down the aisle and meeting his grandkids.
You could use her old baby blankets or her baby clothes, or just find a material with a special print that means something to her. It's something that I'm sure she would love, and could pass on to her daughter one day.
(if you're not a sewer, I'm sure you could find someone to help you with it!)