We love Raffi, too, and have several of his cds!!! I have to second Pete Seeger, Garcia/Grisman (Not forKids Only), and Buckwheat Zydeco as well. Besides that...
Green Chili Jam Band (Starfishing, Coconut Moon, and Magic Bike are their three albums--we have them all and they are well-loved)
Priscilla Herdman (we have Daydreamer, Moondreamer and Stardreamer--all great! Daydreamer is the best for play, the other two are good for winding down gradually)
John Denver-Trains
Ladysmith Black Mambazo - Gift of the Tortoise
We also have some good lullaby collections: "Mediterranean Lullaby", "Soundscapes Lullaby" from Target, "G'night Wolfgang" from Music for Little People, and some classical guitar albums.
They love folk music like Brothers Four, Kingston Trio, or just mama on her guitar...