The Family Magic Tour is phenomenal. The kids have a great time. You make reservations from 407-WDW-TOUR. I do not belive there are any special requirements like staying on site, etc. The tour is about 2- 2 1/2 hours long with one bathroom break in the middle. You do receive a discount if you are a DVC member, and possibly an annual passholder but that I can't remember.
Basically the tour takes the kids on an adventure through the Magic Kingdom following clues to different locations, all the while doing silly things like playing follow the leader, yelling for Tinkerbell, and such. All based on the premise of saving the Kingdom from disaster thanks to some of the resident villains.
At the end, you will meet a character (or two) in a private area reserved just for your group. In the past we have met Princess Aurora and Peter Pan and Wendy. After pictures and autographs, you will then be taken with the characters onto a ride of the groups choosing. There is no better feeling than watching your child/children walking through the Kingdom holding hands with the character heading to a ride. My kids have done the tour three times and have loved it every time. I highly recommend it.
Good luck and have a blast!