Leo says the iPad 2 is $100 less and would probably be ok for the younger kid. The older kid who may be reading books on it soon should probably go for the iPad 3 because of the better, higher resolution screen. He should also just get the Wi-Fi only models so he won't have to pay for a monthly connection to a cellular network. The rumors are strong that Apple will do a 7.85" iPad coming up in a few weeks, so he may want to wait and see what that's all about.
The iPad will come with everything they'll need except for headphones. Kids really like the Skullcandy headphones. Another suggestion is Ety Kids headphones from Etymotic which are designed specifically for kids so they don't damage their hearing by listening to things too loud.
He should make sure to get a good case so the iPad won't get damaged. This Addycase is a good one for that.