Diagon Alley would be more impressive. Lots more places to wander including the dark Knockturn Alley with the talking shrunken heads. They have the puppet show in the "market". The kids can go through Gringots Money Exchange and talk to the Goblin. I think you can walk through the bank part of the Gringots ride as well and then there is that dragon. The Leaky Caldron sign is supposed to leak but I forgot to look. Lots of places to use the interactive wands. There is the Night Bus outside in "London" and you can also watch the window at #12 to see the House Elf. Introduce them to a rotary phone and dial 62442 ("magic") in the red phone box.
At Hogsmeade, the Frogs Choir and Spirit Rally are in front of Hogsmeade Castle. There is not really a good place to sit and wait for the shows, though people sit on the stage until told to move. I believe you can walk through the Dragon Challenge queue with the kids without riding (haven't tried it) as well. On the patio at the 3 Broomsticks if you look over the railing into the water, a lot of fish usually gather there as people probably feed them. The hogs head over the bar there is animated. There is a photo opportunity with the train engine. If you get there early, the wand experience may not be too crowded but the line does go more quickly at Diagon Alley.
I found all the shops in both areas to be crowded and not a particularly enjoyable shopping experience. I can see how it might be a challenge with little ones in tow. But can do lots of window shopping as the windows have interesting things in them.