I tend to agree with Deb. My own kids are 8 and 3...so I understand your situation. I think on-property is the way to go because of the immersion in "Disney Magic".
I really cannot comment on the All Stars yet...but we're staying there in 2 weeks. We picked the resort because its inexpensive and we thought our kids would like the theming. Actually, it wouldn't have been much more expensive to stay at a moderate, but as we've stayed at all the moderates that are currently open already, we wanted to try something new. And as it happens, we won't fit in a room for 4 much longer!
The moderates are all very nice (we've stayed at all of them except POFQ)....I suggest that if the $ is not too difficult to pick one of these based on which theme you and your family most prefer....We've enjoyed them all! Unless, of course, your children would prefer the All Stars.
Depending on your budget you can also occasionally get great deals at the deluxe WDW resorts. We've had rates of $169-$189 at the Polynesian (garden view...but we could see some beach, the GF and the monorail) and AKL savannah view. Not bad.
The suggestion of renting DVC points is also a good one. A DVC one bedroom is the ultimate accomodation with kids because you have a washer and dryer in the room (and a whirlpool tub for you to relax in!). And a kitchen. But the studios are also nice...and the kitchenette is handy with the kiddos too.
I just think there are so many great options on-site, I would have to be really pressed for cash to give up the advantages of being right there in the action. Also, on site you don't need a rental car (its useful, but not a necessity)
Hope this helps!