Do the Palace Picnic!! It's a little pricey (I want to say $75 a head, probably less for the kids), but worth every penny. We were there last 4th of July (actually for several weeks on either side as well, it was a research trip). It will be hot and crowded, but not as bad as WDW in the summer. There are special events the whole week, so try to spend at least a couple of days.
You don't say how long you'll be there, but if you'll arrive in time, "Under the Redcoat" is the last weekend in June. It's a three-day reenactment of the British army occupation, with reenactors from around the country. They march in and declare martial law, then spend the weekend camping in tents on the Palace Green. They interact HEAVILY with both the regular reenactors and the tourists, and it adds a whole new dimension to the experience.
*Hint* After the official "march in," around 6 pm after the daytime stuff ends, they bring their cars around to unload everything. It's kind of fun to watch the juxtaposition of modern and Colonial times.
We actually crashed the cast party this year!

It's on Saturday night of the Redcoat weekend, starting around 11 pm at the garden cafe behind Chowning's Tavern. We had gotten to know some of the regular cast, being in town for so long, but we didn't know about the party. We took a late ghost tour, then went to Chowning's for a snack. That tavern's known for a bit of a "party" atmosphere late at night, so when we walked up, Dad jokingly asked "where's the party?" The girl at the door, who we sort-of knew, thought we were literally asking for the party! So she pointed us in the right direction and we ended up hanging out with the regular entertainment cast and the reenactors until, oh, 3:30 am or so.

I wouldn't recommend taking the kids, though, it's rather rowdy


On the other hand, if you could leave the kids with your parents that night...
Anyway, the Palace Picnic...it's literally a picnic, with more food than you could possibly imagine, all packed into an individual box. Fried chicken, a huge sandwich, chips, fruit, dessert, fresh veggies, I can't even remember everything that was there. We had leftovers for two days! It takes place in the gardens of the Governor's Palace, with an hour of entertainment by the acting troupe. Then they hand out blankets and lead you to a reserved area for the fireworks viewing. It was REAL nice not to have to fight the crowd, and the view was spectacular. If you want to do it, buy tickets early. We got ours two weeks ahead, and they were nearly sold out already.
Have fun! It's a wonderful time to be in Colonial Williamsburg!