I still pod Margo... she is dead on.
If it were me, and DH really wants to go on Christmas, here are the rules I would lay out to him ahead of time.
1) Absolutely, positively, NO babysitting of BIL's children. He said he's going to watch his kids, let him. Don't get sucked in. Every time his kids come near you, take yours and move away.
2) Ignore him. Everyone who said this is a huge power play is dead on. It will be driving him nuts to be ignored - he will likely escalate to try and bring the attention back. Don't cave, no matter what.
3) DH needs to stop placating BIL and getting his mom involved at all.
4) If family asks, simply say that you don't know what the problem is with BIL but you've tried to work it out. Ball is in his court.
Trust me, his behavior will show everyone in the family his true colors. Stay calm and ignore. We need a t-shirt like that to send out to all of our posters with P/A families, I swear.
I personally would not want to spend Christmas with him and his kids, but I understand you also want to see BIL2 and MIL. And it would be really stinky to have to rearrange your day and go out of your way to avoid BIL.
On the gifts, I wouldn't buy him anything. I'd buy nephew(s) a token because they can't help who their father is and they are just kids. But nothing for BIl. He's goading your husband with the gifts he buys for him anyway. Seriously, a Darth Vader mask?
I agree with the posters who also say that if he laid his hands on my child, it would be a cold day in Hades before I ever saw him again. But that's me.