This is just my opinion, but I would report it. I've reported many of my neighbours who allow their dogs to roam off leash. I've never once been bitten by another dog, however I have had off leash dogs rush up to my two on-leash dogs while on walks. My dogs are big German Shepherds and would almost certainly come off as the victor in a fight (especially as there are two of them and they stick up for each other) so I'm not worried about their safety or my safety, but the safety of the off-leash dog. Yes, their dogs are their responsibility, but I love dogs and don't want to see another dog get hid by a car or mauled by an unfriendly on-leash dog (including potentially mine, depending on if they thought they were being threatened!). Yes, there is the chance of escalation with your neighbour, but I also think there is a responsibility to protect your own neighbourhood. If you saw another neighbour going into someone on your street's garage and stealing things while they weren't home, would you report it? Or would you stay silent, for fear of "escalation"?
The women's reaction about her dogs completely mystifies me, as well. My male German Shepherd drew blood on a man's hand on Friday, while at a dog park. The man was using the dog park hose to spray the mud off of his dog. The dog thought it was a game and started dancing around and biting at the water. My GSD decided to join in the game, and by the time we could could get close enough that our dog could hear us calling over the noise from the pressure hose, he had snapped at the water too close to the man's hand and nicked his knuckle with his teeth hard enough to draw a bit of blood. We all knew it was a total accident, but my DH and I still apologized profusely and gave the man our phone number in case there were any problems. That is what a responsible dog owner would do. Any owner who would not be horrified that their dog had bit a friendly stranger should not own a dog in a residential area, in my opinion.