Help With Understanding The Situation

Believe it or not, those two years olds were threatening him.  Leaning over top of a dog is threatening to them, no matter what size person is doing it.  AND the good news is that he growled...yep, that's GOOD news, cuz he could have just air snapped or really bitten.  Growling is his way of saying "excuse me....wanna back off a bit??"    Now, I'm betting you scolded him for growling??  So if it happens again, which it shouldn't....you really have to be right on top of 2 year olds and dogs.....tell him "suzie is sorry...she didn't mean to scare you"....cuz that's exactly what the little one DID.

Banishing the dog outdoors for a couple of hours is not going to teach the dog a thing, nor does it teach the kids, although a momentary separation keeps everyone safe as long as you aren't scolding the dog.  Dogs with arthritis feel even more threatened than pain-free dogs, but Glenda is right that you should not discourage the dog from warning the kids.  Teach the kids not to lean over the dog (or hug him) - ever.  Hard with two year olds...you are wise to supervise.
Also, watch the dog when your kids interact and pet him.  Does he really appear to enjoy this, or are his eyes or his head turned away?  Is his tail wagging or is it stiff or tucked?
 

I have thought a lot about what had happened, and I think the dog views the little kids as puppies.  He was definately letting them know to 'back up'.  He is very lovey dovey with them, he approaches them and licks their faces very generously and tolerates them being very near and putting their hands in his mouth. My two year old and I 'practice' grooming him together.  I was actually harder on the kids than the dog.  He didn't get scolded, and they did.  Putting him out back was more for me than for him.  The growling happened so fast I needed time to try and understand what was happening.  I did talk to him ( the dog) very gently in tone.  This is a very very verbal, noisy dog although he doesn't bark much at all.  Since I got him I have heard him bark twice. I think he really doesn't appreciate the kids treating him like a jungle-gym and also pushing on him may be painful.  My son climbed on top of me to wake me up this am and his little hands do push hard so I can see how it would hurt an arthritic/lame dog.  I am going to be more vigilant about how the kids handle him so he doesn't feel like he has to defend himself.  One of the two yr olds is a girl from next door and those kids are hard and sometimes mean to their dog so I watch with her even more.  What's okay at her house isn't okay at mine. 
I really get the idea he (the dog) does not want to be perceived as sick or injured that it would be a sign of weakness.  I have to really on physical signs of pain, he won't cry or wimper.  Anymore thoughts spiritdogs, and glenda I would appreciate them.  TY  Jules
 

A dog's growl can be quite scary to hear, it's certainly understandable you were alarmed. He sounds lovely, patient and calm. He may become more tolerant of the kids as he grows to trust you more, but well, the safest course of action is to train the kids how to behave around dogs. Your dog is not the only dog they are going to come in contact with. If they think it's ok to lean over and climb on dogs, they are at very high risk of getting bitten by someone else's dog.
Do you have him on a good joint supplement?

I think you're right, the dog already is patient and well behaved; it's the humans that need adjusting.  Yes, he in getting two glucosamine w/ gelatine tablets made by Knox.  Although when it's gone I'm gonna give him Knox right out of a box like Callie suggested.  He really groans when I rub his elbow and shoulder.   Jules

His growl is indeed very scary, his big vocal cords have a deeeeep rumble that could motivate a dead guy out of his casket and up a tree.
A big part of the problem is his recent history in that he doesn't feel secure with his place in his new pack.  Once all his medical issues are resolved including future surgeries, including him in lots of activities will help a lot.  Not only will he be feeling better, he will know he belongs, and fits with us.  Jules

I can only agree with what has been said here. 
 
I will say that we had an aging, grouch akita in our family when my nephew was born.  The akita always treated my nephew as a pup, using growls as warnings.  The darndest thing happened: My nephew would be running throughout the house, as most 2-3 yr olds will do, but when he'd come within 5 feet or so of Shiloh, he'd slow to a polite walk, skirt around the dog and then continue running. 
 
I know it's not the same situation that you're encountering, but with some education and some patience the dog and the kids will learn boundaries with your help.  Also, please never leave the dog alone with the children at any time, even just for a moment!

Couldn't agree more, things good and bad have a way of happening in the blink of an eye.  Jules

I think he really doesn't appreciate the kids treating him like a jungle-gym

 
Most dogs hate this.  Most tolerate it, but some don't.  We primates love to climb and hug.  Canines aren't into it. []
 
You are correct in assuming that most dogs are stoic.  To show weakness invites attack by predators! 
My only suggestion is that you never leave your dog alone with kids (I never leave mine alone with kids, and three of them are registered therapy dogs, so don't take that as a sign that I think your dog is aggressive) and that you make sure the dog can eat and rest without any kids present.  Teach your kids to talk to the dog before approaching and not to jump on him.  It helps to keep them off the floor, and have them pat the dog while they are in chairs and the dog is on the floor.  Most face bites occur when a dog "disciplines" an errant pup (child) that has not perceived the dog's warning (body language between dogs can be quite subtle, and humans often miss it - thus "he attacked without warning")

I have been watching all the interactions lately with 'new' eyes, really taking note of Mack's language (body).  And I didn't know just how much pain he was in until today.  I had taken him off of Rimadyl to see how he was without it since we have no history on him.  I had just put him back on Rimadyl and he is a totally different dog.  It's like someone flipped the 'happy' switch.  He is wiggly and sunshiney. I still do not leave any kids alone with him, nor will I ever.  I also leave these intructions with son's daddy when I go to work to remind him.  I am going to have to keep him on Rimadyl until he gets elbows fixed and then I want to put together some type of maintenance plan for his joint health so he can live as painless and healthy as possible. He has many years ahead of him.
He is more secure in general when not in pain. Also I am increasing his praises for several things:  when children are near him and he is social with them I heap verbal praises on him.  I touch him all over with and without the kids near, and I am expecting more obedience out of him so he knows he fits in his pack.  I am reminding Nick to walk around him and not accidentally step on his feet, and to talk to Mack gently.  Mack is our family member so all rules apply with him:  no harsh voices, no hitting, be respectful, etc just like with humans so the kids don't treat him like an object to be ignored or mistreated.  I think with pain management, securing Mack's place in the pack, and teaching the kids respectful dog ownership everyday we are going to avoid a tragedy down the road.  Thankyou so very much ladies, I really appreciate your input and perspective for a happy resolution.   Jules