Joe,
I have all of the lenses you're thinking about, lucky me! (I don't have DA-L 35 but do have FA 35 which is similar) So here are some thoughts I have.
I agree that the DA 40 limited for $375 used is not the lowest price you could get. Look at the pentax forums marketplace and you'll see that used DA 40 limiteds often sell for around the $275-300 range.
If you want a super lightweight, impossibly thin and compact lens for your camera, the DA 40 XS is a solid choice, and a particularly excellent value if you get it used. (shameless plug-- I'm selling mine right now on the marketplace...)
But I also agree that for indoor low light use, you may want to get the DA-L 35 f/2.4. It's a great value and a little faster, plus a little wider, than the DA 40.
For interior shots of kids, the even wider view of a DA 21 would be a big benefit, but mounted on your K-7, I'm afraid that the f/3.2 is not fast enough. For landscape photography though, the DA 21 is awesome!
You may want to look into any of the 50mm lens choices because they offer faster than f/2 but you may find that the FOV is a bit too tight indoors. I'd say the same about the DA 70, it's a fantastic lens, one of my favorites, but it's harder to use indoors because of the minimum focusing distance and that you'll pretty much only get above shoulder shots of one kid. That said, I've "made it work" many times, and love the pictures I take with my DA 70, whether indoors or outdoors.
the DA 18-135 is a great WR lens to match with your K-7 but consider buying it used. The full-price for the lens brand-new, without buying it as part of a new camera bundle, is a bit high and may not justify its optical quality and convenience.
Originally posted by alphanerd You can even get a K-01 with a 40mm XS for ~$300!
PS-- that's no longer true; the price has since risen to about $399 for this bundle.