I just got back from Colonial Williamsburg yesterday. I would definitely recommend the Woodlands Hotel. It is right next to the visitor center which is very convenient. The hotel has an awesome breakfast (bacon, pineapple, eggs, all kinds of pastries and make your own waffles) and when we went they had activities planned every day including pool parties and lawn games (some were better than others. I wish the activities directors were more enthusiastic though). The rooms are decent and clean. They have some really cheesy mini golf and shuffleboard. The hotel is not meant to be a resort and it doesn't have resort prices. Hotel guests get discounts on tickets and also get a free night program.
If you are going to Colonial Williamsburg some of the sites are more suited to kids than others. The Governor's Mansion has a long 30 minute tour that will bore the children. The Powell House has kids activities all day long and is a good option for kids. The kids can play in the mud at the Brickyard. They also have kid's activities at the Museum The kids can join the army at the encampment and some kids think it is really funny but my dd almost cried because the drill sergeant called her a maggot (all in play of course but a 5 year old didn't understand). Kids also love the Gaol (jail) The Rev Quest is a fun game but it takes a really long time and not really geared to younger children-they will probably lose interest. They do have a kids map and the kids can five places punched and get a free dessert at Huzzah's located at the hotel. The food there is not fine dining but a great option for kids. Another big tip is dinner reservations are required at the restaurants in Colonial Williamsburg but not required for lunch and lunch is half the price. Stephano's at the Merchant Square is another excellent option for kids. If you leave the immediate area there are all kinds of options like Subway, Chili's, Applebee's and all your normal chain restaurants. I think for kids, two days at Colonial Williamsburg is a good amount of time. The place closes at 5 pm. You can get an all inclusive ticket and do everything that includes Busch Gardens and Water Country USA.