XBOX 360 by far just based on the game library. Sure PS3 has Blu-Ray, and that's why you'll pay twice as much for one. An 8 and a 12 year old can survive without Blu-Ray capability, unless you want to use that feature for yourself.
I was a diehard Sony fan through the PS2 era but decided to give Microsoft a try when the new consoles came out and PS3 was going to cost $600. I don't regret it one bit. PS3 has a few great games exclusive to their system (I can count them on one hand), but other than that 360 wins by a mile in the game department.
A word of advice, 360s have been known to have hardware issues which require sending it off to Microsoft for repairs. They have a 3 year warranty so you don't have to worry about paying, but it can be a pain to be without your system while they fix it. Only "insiders" and tech nerds know about this right now, but a newer version of the 360 has just appeared on store shelves. Nothing is different on the box or the look of the system itself, but they have shrunk the GPU chip on the motherboard which results in much less heat and stress on the system and will reduce the occurance of these hardware errors that have plagued earlier 360s. You want to peek through the window of the XBOX carton in the store and try to find a console labeled "12.1A" on the back for power consumption. This will be the newer console with the updated motherboard. Older consoles will be rated 14.2A.
I just picked up a new one at Fry's Electronics today. Not all stores have these new versions yet (codenamed "Jasper" 360s). You can also try to judge by the manufacture date which you can view through the same hole in the box, 10-23-2008 an above is the best bet for the newer more efficient console.
The only other decision you'll have to make is which package to get, XBOX 360 is available as "Arcade", "Pro", and "Elite".
Arcade
Console
Wireless Controller
256MB memory
Standard definition AV cable
Pro
Console
Wireless Controller
60GB harddrive
Headset
Ethernet Cable
Standard/HD AV cable
Elite
Console (black)
Wireless Controller (black)
120GB Harddrive
Headset (black)
Ethernet Cable
Standard/HD AV cable