"How about bookmarks? If you have a laminator your kids can make really nice ones with color, glitter, paper collage, small photos, even leaves and flower petals (dry). Either decorate a large paper and cut into strips, or decorate individual strips. If your older one can make letters, they can even personalize.
PS laminators are great for all kinds of things (not just kid craft), totally worth it."
A Photo/ Art book:
"What I think is a nice idea is to allow them to make a book of all of their favorite photos and drawings. One of those personalized albums through snapfish or another similar website. You can take pictures/scans of their favorite projects and create new ones and upload them as a jpeg and incorporate them with great photos of your children. As much as adults love handmade projects, I find that they eventually end up in memory boxes, lost or forgotten about (I'm guilty of that myself) Photo books can find a permanent home on a person's coffe table and they can appreciate their work all year round. Think of it as a scrapbook that will last forever and it could even become a yearly tradition. I've also found that as much as people love handmade gifts, I think parents take pleasure in their children's work much more than the recipient."
Ornaments (These decorations need not be just a holiday-related item!):
"We make an ornament for the grandparents Christmas tree, hand/foot prints, felt Tomtens, birds, snowmen, Popsicle stick sleds, etc."
A gift basket:
,"A small basket of favorite things, decorate by the kids..."
A potpourri package:
"You could even make a potpourri package with an empty bag, stamp of wintertime scene [or other seasons if outside of the holidays], and let the kiddos fill the bag with scoop of whatever dried fragrant plant you can find! We actually did this at the BBG First Sunday program, and had a blast."
The Painted Pot:
"Have you be to The Painted Pot? They could paint or put handprints on ceramic items and then have them fired. They also do fused glass items. There are many, many shapes from which to choose, from functional (dishes, etc.) to purely decorative figurines, plaques, ornaments, etc. very fun. Allow a week's lead time for firing. No connection -- just a happy ceramic painter (you should see my gorgeous light switch plates!)
"A favorite photo framed."
Other ideas include homemade baked goods, cookies or jams:
"We also make gingerbread men, my daughter decorates, and then box them in nice packaging. Thumbprint cookies are fun, too."