I bought the kids a set of Knifty Knitter Looms from JoAnn Fabrics, and Peter and Boo work on it occasionally when they're driving me nuts and I make them sit on the couch and knit.
(Well, that's my reasoning. What I actually tell them is that it's time for "Fine Motor Skills Development.")
They don't seem to mind too terribly much, especially when it's time to finish the project and they can finally wear it!
(Boo's working on a scarf that she'll most likely finish when she's in high school. I don't truly mind because then I won't have to worry about sharing my stash with her.)