L.F.
I have the iPad 2, and I love it. From what I understand, the only difference between the iPad 2 and iPad 3 is the high definition screen and better camera. But if it will be for your kids, I would go for the iPad 2. You never know if they might accidentally break it. I know you will be buying it with your credit card miles, but I saw that the iPad 2 (16 GB w/no 3G) is on sale at Walmart for only $399.
I heard that one of the drawbacks from the iPad 3 is that there is a hotspot where the battery is. If you hold it or have it on your lap for an extended period of time, it gets uncomfortably hot. It's not a burn hazard, but mildy annoying.
Good luck! I never expected it, but my children are learning a lot of Mandarin Chinese through the free apps, and have fun doing it.