First off - (general) you will not feel funny if you dress up or not! There's plenty of both there!
The first year I went (no family - went with friends though) I wore a t-shirt with an image I designed (obviously without the 2008 on it, since it was 2006!):
The second year we did a Peter Pan theme:
me: Wendy Darling (even had the ringlet curls in back!)
DH: John Darling (his idea! really!)
DS: Peter Pan - with a ship costume for his stroller
nanny: Tiger Lily
This year just DS and I are going and we're going as (original) Mouseketeers. {Now if I can only find him a short sleeve mock turtle neck shirt!

)
Not Disney specific, but in 2005 our family went as M&M's -- just in town, but it would work at WDW too:
A really cute idea for large families/groups/friends would be 101 Dalmations.