What is the best way to tell a 7 and 9 yr old their beloved grammy has just been diagnosed w/ lung cancer?

Cancer. Kid this age adapt better than adults. They feel from you, is okay to say she has cancer. No need to go over issues of passing away or predicting what will happen. You can prepare , but don't predict.
Don't be graphic, Tell them gram is very sick. Let them see her, love her, and hang out with her (if she's not still smoking like a chimney). Do not prognosticate, cause no one knows, but find out if her treatment is for cure or to relieve symptoms.