The Kindle Fire is what you want to look at. Stock it's going to be able to play some lite games like Angry Birds and such, but you will have the potential to root it. Hardware isn't great, but it's exactly what your kids will be able to use.
Not due for another month, and I suspect it won't come with the regular Market. Probably Amazon Market. And a root process won't probably be available for another 2 months or more. Considering nobody's really had a hands on with it, it may really suck.
For the younger one, a Fire might be ok, provided they release it on time.
Also, you may want to check out the HTC Flyer, or T-Mobile's Springboard which will be released soon. Specs and hands on are good, but you have to have a 2yr contract I suppose for the springboard.
For the older, I would be looking at something he or she could use for the next 2 or 3 years. So a full size is warranted. Acer A501 or A500 would be my choice Extremely easy to root, and has a full size USB2.0 to connect periphials. A500 16gb (expandable with SD) was currently only 340$ last time I looked.