We have stayed in SF many times and after trying lots of places, we found a comfortable home away from home at the Sheraton on Fisherman's Wharf. We also have 2 kids that refuse to sleep together so we get a room with a king bed and a sofa bed and they give us a rollaway too. Mine are 10 & 15 now but we have taken them since they were babies. (If you look at the king bed room pics, we put the rollaway under the window and the sofabed is on the opposite side.) We had plenty of room and just love how clean and up to date everything is. Here is a link
http://www.sheratonatthewharf.com
Be sure to click on the specials page because some rates include breakfast but I think
AAA rate is the best. We have tried to go the budget route and always ended up disappointed with dirty rooms that were out of the way or even scary so we stick with the Sheraton all the time now. It's a big city and you pay big city rates but you get what you pay for so saving $50/night might not be the best idea here. Just in the wharf area, I have stayed at the Hilton-not very kid friendly, the Marriott, the Holiday Inn on the Wharf and more than I can name but the Sheraton is the best. The second choice is the Holiday Inn Express but it just isn't as good a location but they may have bigger rooms with breakfast included at a lower rate.
SF is really a nice city with a lot to do cramed into in a small amount of space so you can easily take taxis where you want to go and the cable cars and bus system is really good. I think someone said the city from end to end is only 7 miles wide.
At the wharf, you will visit the wharf of course but our kids also love Pier 39. It has shops but also a double decker carousel and a really nice aquarium, perfect for your childrens ages. You walk through a see through tube under the water and it is so fun. There is a Rainforest Cafe on the wharf that kids love and you can also walk to the maritime museum and walk on all the old ships. My kids thought that was so much fun but they loved walking up to Ghirardelli Square for ice cream too. There is a window to watch goodies being made. All of this is easy walking distance, really!
You can catch the cable car up to Union Square (sometimes a really long line!) but with 2 young kids, I can't imagine them wanting to shop but from Union Square, it is easy to get to China Town and they might like to see that. That is the kind of shopping little kids like, tons of cheapie junk stores with interesting stuff they might never have seen before-lol.
You can take a cab over to Golden Gate Park and there is a ton of stuff to do there or take a trip over to the zoo and that is right next to the ocean so you can walk out there too.
We love SF! You will have a great time.