The cheapest lodging you are likely to find is the Chicago HI Hostel http://www.hichicago.org/
Type in Chicago on the search forums box at the top of the page for a great deal of information on what to see and do in Chicago. What mode of transport will you be using to get to Chicago?

Taste of Chicago is going on the beginning of July which brings crowds and fun things to do. Lincoln Park Zoo is a must and it is free (bring some bread because the ducks love to be fed!). Lots of neighborhood festivals in the summer so check out some websites. Very fun to hop on the el train to a Cubs game! Navy Pier has "exhibits" as well that rotate. Skip the Children's Museum, unless you have never been to one. Kids love Rainforest Cafe, the Lego store and American Girl Place. Dave & Busters is very fun "indoor game" area that would be a winner for the older children. The architecture tour is amazing, if you think your kids would last through that.

Taste of Chicago has been scaled back, its just July 11-15 this year.

I would recommend Shedd Aquarium and second the vote for Lincoln Park Zoo.

My kids would have been happy to spend the entire time at the Museum of Science and Industry--their parents, too.

I spent three days in Chicago last June with my 10 year old daughter and 13 year-old niece. They loved Navy Pier (especially the rides at night!), the Museum of Science and Industry, and the Shedd Aquarium most; the Field Museum and bicycle riding along Lake Michigan came in second. Shopping at AGPlace and Macy's (the old Marshall Fields) was also fun.

We stayed at the Hotel Monaco and enjoyed it a great deal.

I second all of the wonderful museum and zoo recomendations. I also second the bike rentals along the lake (don't worry - the little one doesn't have to peddal if you rent a 4-way bike). Also, take advantage of Milleunium Park concerts - usually free - with a picnic. Absolutely my favorite summertime thing to do. Don't know your budget, but the Wit at State and Lake is ideally situated to take advantage of all that is mentioned. Great restaurants too!

One more thing - Architechure Boat cruise is another favorite for all ages.

My 4 year old had a great time playing in the water at Crown Fountain. Also they had tents set up on the promenade at Millenium Park that had kid activities during the day.
We stayed at the Hyatt on the Riverwalk and loved the location.

The big ferris wheel at Navy Pier is popular with kids too.

We thought Navy Puer was pretty much a snooze, but we all loved Shedd Aquarium, a quick turn through a few exhibits at the Art Institute, Cubs and White Sox games, Taste of the Town, biking/surrey/roller blading along the lake, a free concert in the part (Grant? Lincoln?). they even lived Michigan Ave.

I asked my 4 year old last night what was her most favorite thing about Chicago. She told me she had lots of fun walking across the bridges.