T.B.
I had almost the same problem with my ex-husbands mother! It was awful...She would take my daughter and treat her as though she were hers and not mine. I finally had to come out and tell her that the baby was mine and she was not her mother! It did cause some tention but at the time we were living with his family, so I couldn't get away from her. I became the bad guy in that situation because she was trying to make up for a child that she had lost and everyone thought that I was being to hard on her. The point was that this baby was mine and not hers and it took me standing up to her, to get her to realize that I wasn't going to let that happen.
My advice...you need to tell her that she is the grandmother not the mother. It may make things hard and she may not talk to you for a while but if she really wants to be a part of the babys life she will get over it.