I think it's a matter of personal preference and the type of vacation you'd like to have.
I'm a big fan of staying on site. I understand that it costs more, but I like that I don't have to leave the magic until it's time to go home. I like that I don't have to drive anywhere unless I want to -- and we drive to FL so it's not a question of paying for a rental car. I don't want a kitchen on vacation. I don't want to do laundry on vacation. (That said, I only travel with small kids about half the time -- my nieces are 5, 4, and 1 and they can go through an astonishing amount of clothes.) I like playing all day, collapsing at night, and starting over the next morning.
My aunt and uncle, who live here in Chicago, built a really lovely 5 bedroom house in Clermont with a pool/hot tub because they wanted to go down to FL a lot with their grandkids. They rent it out much of the year, but it is always available for the family if we want it. I did it once, but I'm really an on-site sort of girl. (And I work for a non-profit, so it is a matter of priorities. There's not a pile of money behind the house or anything.) My favorite thing about Disney is the details, and I think the resorts are the best examples of Disney putting on a show. There are others who truly like having room to spread out, their own pool, a kitchen, etc. That group would be much happier off site, possibly even if those accomodations cost more.
Given the ages of the kids in your party, I'm guessing you'll be spending a lot of time at the MK. If you can afford rooms at one of the three monorail hotels or the WL, you will benefit from pretty speedy transportation to the MK. You can take boats and monorails (or walk to the CR) without folding up strollers, dealing with car seats, etc. If you stay at a place like the Beach Club or Swan/Dolphin, you'll have easy access to Epcot and Disney Studios, with a longer bus ride to the MK. Transportation won't be perfect anywhere -- and the monorail only goes a few places - so I wouldn't go in expecting that. At a Disney resort, though, you will also have the opportunity to go to the parks for extra magic hours, use the package delivery service, have Mickey & Stitch make your wake up call in the morning, and buy a package with the dining plan if that appeals to you, among other benefits. Be sure to look at all the angles.
You will need at least two rooms for your party, even at a deluxe resort, unless you rent a villa. You also need to factor in extra person charges for the extra adults if you can squeeze in two rooms. At that point, I don't know that any sort of financial argument makes this look like a "good deal." If you choose to stay in three rooms at a moderate or value, you will be dealing with bus transportation to all locations on property. You won't need a car or to pay for parking, but bus transportation can be hit or miss for some folks. (I don't have any horror stories about buses, but lots of people have had long waits.) Final calculations will still probably come out looking better for an off-site location.
If you can easily afford it, I think the magic of staying on site is worth it, particularly if this is your first trip. If you'd rather use the money saved by staying off site for other activities, like character meals or souvenirs, there are many very nice offsite accomodations that offer more space and different ammenities. Do your research and decide what kind of feel you're looking for in a vacation, and I'm sure you'll find a great option.
Oh, and one last thing, September 2009 isn't that far away in Disney terms. And, with promotions like Free Dining this year and previous years during September, lots of people make reservations early in the hope of benefiting from a promotion during that time frame. I'd make the reservation in the next few months if you plan to stay on site. You can always change or cancel, but I would want to have something booked with a party as large as yours.