Our DS loves the Hasbro Tonka series. He also loves Backyard Baseball. Both of these have many titles from which to choose (e.g. Tonka Construction, Rescue, etc... and Backyard Football, Soccer, etc...).
DD loves anything Disney and has a bunch. She also likes the learning CDs, i.e. Kindergarten, Grade 1, etc...(think they're called Reader Rabbit).
DH swears the kids CDs mess up our computer so we're careful about what we choose to let them play. (Clifford crashed our computer once.

) We just bought a new notebook computer and are letting the kids have the old one just for their CDs.
If you get on the internet you can put kids websites on your Favorites list and they can go on them for free. Our kids (age 6, next month 7) like Nick.com, Disney Online, NOGGIN, New Rule School, HotWheels.com, PBSKids, CartoonNetwork, etc...
I really love the HP Image Zone software for our photos and home videos. We buy HP computers.
Walmart and Walmart.com have good deals - they are the largest retailer of HP/Compaq in the US so can offer them at a discount. Couldn't find a better deal anywhere on the HP notebook we just got. (I find their customer service good, too). We got a really nice HP desktop with a 17" monitor and speakers two years ago at WM for under $500 - they also have layaway so you can be sure not to miss out on any good deals. Right now is a good time to look because they still had some back to school deals.
I do not recommend buying an E Machine - inlaw's has had nothing but problems and you can get a regular computer for the same price.
Good luck. I think it's a great Christmas gift for the kids, they'll have hours of enjoyment and so will you.