We're also expecting a baby in '06 (due April 22) and planning baby's first trip to WDW. We're taking along my family and my husband's family (about a dozen people) and booked four rooms at POFQ. We had looked into getting something like a 3 bedroom villa, but it actually works out to be a lot more expensive. The best deal for a family is either to get a couple of rooms or to get a cabin at Fort Wilderness. We did the Fort Wilderness cabin a couple of years ago and thought it was great. You get enough room for 6 people, a living room area, and a kitchen, which is great for storing milk, washing bottles, etc.
As for the princess, there are some great princess activities. Cinderella's Royal Table is gorgeous. We were lucky enough to get into one of the breakfasts there a couple of years ago with my little sisters. The reservations fill up within MINUTES every day though, so it's very tough to get in there (I had no idea what luck I had the first time we booked it). However, if you can't get a reservation there, you can do a princess breakfast at Restaurant Arakesh (sp?) in the Norway pavillion at Epcot. Both breakfasts have a bunch of princesses who come around to the tables, although you won't find Cinderella in Epcot.
Another great princess activity, though quite pricy, is the princess tea party that they hold in the Grand Floridian. I took my little sister last year, and it was really something else! Each girl gets her own princess Aurora doll and crown, and there's a woman called "Rose Petal" who tells the story of Sleeping Beauty and sings beautifully. The girls learn to dance and bow like a princess and to do sign language saying "hail to the king, hail to the queen" etc. Then Aurora herself comes out and dances with the girls and spends time with each one of them individually. Tea and apple juice and finger sandwiches are served, but don't go expecting a meal, it's more about entertainment for the little princesses.
