it may just take some time for them to come to terms with the animals? From a kids perspective they probably look a bit freaky! Lol.

I think what you are doing sounds great, so keep trying to get them to interact with the cats and friend's dogs, but I wouldn't push them 'to the edge' so to speak as you don't want to scare them iykwim. can you take them to a pet shop/animal shelter and show them some cute puppies and kittens so they can see (especially at that age) that they are cute and fluffy and lots of fun! Even if you could get them to help out with grooming or playing with them.

Maybe read them some books that involve animals, I dont know what age group of books you would be reading to them, but some 'fun' stories like The Poky Little puppies (it's a Golden Circle book) might also help them to see that dogs and cats aren't scary.

I have a cousin who used to be terrified of dogs...she was at mum and dads when I was a younger kid and i remember her screaming at our jack russell mix through the glass sliding door! Not sure how she is with dogs now, i dont know if she has overcome her fear or not.