Munich

Try the Hotel Ludwig opposite the train station. Tourist class hotel. Read my and other reviews on tripadvisor.com Difficult to recommend sightseeing since interests vary. Purchase a few guide books. Each will give you a different perspective on the same sights. I use Frommers, DK, Steves, and Lonely Planet. If you get your kids involved in planning, they will enjoy it more.

I would not recommend the main train station area because it's seedy with adult shops and nothing especially nice to see, especially if you have young teenagers. Also the Marienplatz is SOOO much nicer and easily accessible by U-bahn (metro) for about 5 minutes which you will catch in the main train station. If your have a healthy budget for hotels try the Hotel Torbrau - I know they have family rooms. If you budget is not quite that high then try the Hotels Blauer Bock or Am Viktualienmarkt. Both of these hotels are located next to the Viktualienmarkt outdoor market.

Salzburg is fairly close by train and would be a good place to visit. Due to a massive traffic jam on the autobahn, I was detoured through the countryside between Munich and Salzburg and it was quite nice. There is a lake between Munich and Salzburg that you might want to check out. It's looks like that it had a lot of water sports.

Pam

For visiting the Bavarian hinterland, just don't fall into the trap of staying in Fuessen, there are many superior options in the immediate area, such as Mittenwald, or Garmisch-Partenkirchen.

If you're wanting to day trip to the castles and Fussen, I highly recommend Mike's Bike Tours for that. We had a spectacular experience and tour and we don't usually shell out for those types of things, but it was well worth the money.

A nice clean place that is centrally located and cheap is the http://www.pension-lindner.com/index1.htm We stayed there and had a great stay.

Mike's Bike Tour is a great overview of that area and the 4 hours go by quickly. You also get an introduction to the English garden which is handy info. The VictualMarkt is an experience in foods, whether you buy or not. (Un)fortunately it seems like most everyone speaks English so the experience is almost too easy. Buy some apples to eat later, if nothing else.
Just riding the trains is an adventure. You can hardly get lost, though a system map is a must; with a day pass you can get on and off as many times as you want, transfer to another line, explore the bigger stations. Family of 4 should get a "Partner" ticket. Choose the British flag on the ticket vending machines for English. Stop for gelato.
Check out the BMW plant, although I understand plant tours need to be arranged well in advance.
Salzburg is a good day trip, especially using the Bayern Pass. Beer gardens are just fine for families. Search out the Augustiner Brewery/beergarden in Salzburg.

Mike, I just returned from Munich a few days ago, so have a few suggestions.

For lodgings you might try Hotel Uhland. It's an easy 10-15 min. walk from the station, and located in a really nice area. The staff are fantastic and I really enjoy their breakfasts. There's a Sofitel Hotel and Meridien right by the station, but I suspect they're a bit "pricey".

If you want to visit the Castles on a day trip, you might consider Radius Tours (they have an office in the train station). They take care of all arrangements, and provide a good overview of the "Mad King". They also have several walking tours of Munich which are quite interesting.

Your children might enjoy the Deutsches Museum. There are LOTS of displays covering different subjects (aviation, power, technology, etc.). If you decide to visit the Englisher Garden with your children, be aware that it's common at times to see sunbathers displaying the "full Monty"!

Happy travels!

Salzburg is definitely worth a day.

My kids (8,12 & 16 last trip to area) all enjoyed the salt mine tour at Berchtesgaden. We don't do much WWII history so skipped Hitler stuff and saw the view and the mine.

I really like the Alte Pinokotek (medieval and classic art gallery). I also like the Neue Pinokotek (impressionists) but don't get the Moderne ("Is this a light switch or art?" or "They must be hurting, they left this huge crack in the floor" LOL!).

Be sure to visit the Chinese Pavilion in the English Garden area. Within Munich you don't need a car - the transportation system was built out during the '72 Olympics (visit the Stadium and Village) and has been massively expanded.

The lake alluded to in another post must be Chiemsee, a popular bathing lake often bypassed by tourists heading to or from Salzburg. They are missing a lot: after all, Herrenchiemsee Palace - another of King Ludwig's edifices - and Frauenchiemsee are two attractions there. South of Munich also are the Starnberger and the Ammersee, two lakes very much loved by families (warm water). The Andechs monastery is noted for the great beer garden and is on the way to Neuschwanstein/Füssen and Reutte. Be sure to go on the summer toboggan near Reutte - there are several in the Bavaria/Tirol area, but this is reputed to be the longest one in the Alps.