Hi Carrie!
First I would decide which park you will probabaly spend the most time at. My kids are 4 and 6 now, but when they were 1 and 3, Magic Kingdom was the be all, end all! If you can afford to stay in a deluxe hotel, Wilderness Lodge would be the best choice for your young kids. It's not on the monorail, but it is very close to the MK.
Don't make the same mistake we did on our first trip, do your homework on the resorts, and coming here was the smartest thing to do! I didn't know about these boards back in 1998, but I found them soon after we got back. The only down side to the deluxe hotels is no food courts. They do have small cafe type places, but if you are going to be eating mainly counter service, and your going to need milk and stuff, you might opt for a moderate.
On our first trip with out 3 year old (I was five months pregnant with #2!) we stayed at the Poly in the concirege level building. The
travel agent recommended Wilderness Lodge, but noooooooo, we had to stay at the Poly. Big mistake. It was way too far away from everything (at least a 20 MINUTE BUS RIDE!), and it had a long hike from the rooms to the Transportation center. The pool was boring, and the little cafe place was constantly mobbed, with lines going out the door. Not fun with a screaming two year old as I'm sure you can imagine!
Everyone here has opinions on the different resorts, and I have to agree, if you can stay at any the home away from home resorts those are ideal. We will be renting DVC points on our next trip, so we can have the microwave and mini fridge. You might want to look into doing this too. You can find more information on it over on the DVC board. If I had to recommened a moderate, our favorite is Port Orleans French Quarter. It is right in the middle of WDw property, it has a nice food court, a boat to Downtown Disney, and it is small, so it's never too far from a bus stop or the food court.
Of course my two boys think All Star Movies is awesome, so wherever you decide to stay, the other poster was right, you can't go wrong at any Disney resort.
The best advice I can give you is: Take you own double stroller if possible because you'll be surprised at how much you'll need a stroller away from the parks!!
Let us know what you decide!