Hey Wiggsy
Loads of kids on Kapalai sounds like an accident waiting to happen. I have nearly slipped off the edge several times myself - but Tiger beer might have had something to do with that.
They have plans to build a sort of artificial beach thingy at Kapalai to address this issue but I am not sure what this will look like or indeed if it will be finished any time soon.
Lankayan is an island I am very fond of. Crossing (up to 2 hours) can be a little ***-numbing if there are waves but once you are there it is really lovely.
It is a tiny island with only the resort and a discreet army presence (good for security!). You can walk round the island in 10 minutes on soft golden sand being lapped by shallow water. In the shallows you can see schools of baby black tip sharks chasing their prey and there are often turtle heads popping up all over the place. I think it sounds perfect for your group. Loads of places for the kids to play in safety - they may also be able to set baby turtles free after they hatch.
In terms of the diving - it is NOT Sipadan. Nor is it anything like Sipadan. There is plenty to see though. The best thing about the diving here is that the sites are so easy to get to and usually very easy to dive. Great for small stuff and quite good in fish numbers. There will be a few larger things around but no big schools of bumpheads of heaps of sharks like Sipadan. Whale sharks are a possibility though.
Here is more on what you can expect underwater:
Lankayan Dive Sites
Lankayan Resort has also undergone a facelift not long ago so it is looking good!
It can take a maximum of 48 divers in a variety of accommodation including chalets and standard rooms some of which are in the same building making it like a house (nice family atmosphere). But this means you will need virtually the whole place so booking in advance is key!
All about the resort is here:
Lankayan Resort
Of course if you have a bunch of kids another great thing to do when in the area is stay at the
Sepilok Nature Resort and check out the
Orangutans
Hope that information helps. Let me know if you need any more.
Cheers