Easy way to deal with kids:
You don't have to make them immortal/unkillable the way characters are in Oblivion (We think you got the memo on that one that it's really, really annoying). All you do is give them plenty of hit points, and whenever they get struck by a weapon or spell, they run in the opposite direction. And their speed is greater than any other character in the game, even with enchantments. Voila, death is avoided.
Oh, and yes, I think children would be a wonderful inclusion. I think they could serve all sorts of useful roles - couriers, eyes & ears for the Thieve's Guild, etc.
That was done in Fallout 3. If you attacked a children it would run but it could never be killed or knocked unconscious. But yes, adding children with these roles would be cool. But the immersion always decrease when you have them to be immortal.
But someone will end up modding the game and getting rid of the essential tag for them.
@Shades: Funny, I felt more immersed in Oblivion where it had no children then in Fallout 3. I don't even look at them, they are just annoying...