You do not need to apply separately for the kids, since they qualify as derivates of the application for your sister as long as they are under 21. But unless they are born recently, chances are they'll have age out problems (be over 21) at the time an immigrant number becomes available for them; but there's nothing you can do about this now and there are certain provisions in the CSPA to deal with this situation (who knows what the law will be then, anyway). But if you do apply, her kids should look at the then-current law and their situation carefully before deciding to get married (unless it's to a USC!).
Oh yes, and a consequence of your application could be that your sister may get difficulty entering the US on most nonimmigrant visas (such as visitor visas), since she needs to prove nonimmigrant intent/closer ties to another country.