Dear Aine--I think a combination of both ear training and reading is best. That way, they associate the notes on the page with the sound, and they will be able to use the two skills in reinforcement of the other. (e.g. they'll know what a third *looks* like as well as what it sounds like)
I'd say start them off on whichever high whistle fits their little hands. This means that they probably won't be able to play together for awhile, because the 5 yo is playing an A whistle, and the 8 yo is playing a D whistle.
I think the hardest part of the whistle learning experience for the kid is learning to control how hard/soft they have to blow. The hardest part for the parent is listening to them learning how hard/soft to blow. You probably don't want to start this project when they will be in the house for days on end, like school vacations. Buy ear plugs for yourself--the nice discreet kind, so they don't know they're splitting your skull along with all your precious antique crystal goblets. You get the picture here, I'm sure.
There are a ton of kid's pw books--if your local music store doesn't have em, check out Amazon.com, because there are folk books, disney movie music books, kid's song books, all with big letters, large notes, and colorful illustrations.
Have FUN!!! (I admit to some envy!)
V