I have gone with my kids three times now, and their ages are 4 and 2, and we always stay at the Contemporary, in the tower. Why did we choose that? you may ask. Well, for me, it was where I stayed in the early 70's when I visted the magic Kingdom for the first time, so i didn't even think about anyplace else. However, both my kids love it. In the tower they can look down the Grand Canyon Concourse and see the characters at Chef Mickey's, look out and see the Magic Kingdom (and fireworks), and we always have to stop and watch the monorail run through the resort. My sone loves the arcade, and the food & fun center is great for the kids (plus they play Disney cartoons/tv on the television. The elevators also talk to you in character voices to tell you what floor you're on.
Besides all of this, the monorail is right in the hotel, and we can get to the MK in a 10 minute walk, which works out great when the kids are ready to nap (put them in the stroller, and walk slowly, they are usually out in 2 minutes). The place is much more kid-friendly than most people would imagine, and I know my son loves it! (so do I for that matter, but I'm just a big kid anyway)