Thank you all. thank you
To AltTravlr: thank you especially for for your specific suggestions and book recommendation. I will pick that up and have a great starting point.
Thank you all! I will check back in with this forum once I have a tentative itinerary.

Travelingtucker - great advice and it sounds like you're going in the right direction. I'd spend time in Rome and Venice. I'd not stay in Florence, but I'd look for a smaller city to give you a different understanding of life in Italy, somewhere that would work for daytrips.

There are many lovely towns in Umbria and Tuscany. Or farther north, Bologna is a great base for day trips. Look at apartment rentals - it's soooo much more pleasant with kids.

I too would start with going to the library and getting Rick Steves Italy and Portugal DVD's. I think your whole family will enjoy watching them together and deciding where to go. His style is very fun and down to earth.

The reason for getting Portugal is I think if you have family there it would be a wonderful experience for you to visit them and enjoy the country from a natives point of view. I would fly into Lisbon, spend a couple days there, then rent a car and drive to your relatives and spend a few days with them. Next I would return to Lisbon and fly to Rome. I would spend a couple days in Rome, and then train or rent a car to go to a seaside and or coutry location for a couple days. Finally I would return to Rome and fly home.

I would stay in apartments for the extra room and convience of having a kitchen. I would prioritize the sights and museums in each place and reslove myself to the fact that you will only see a select few or risk wearing out the kids patience.

I do not think (my opinion) that you need to spend your entire time in one area as this is your kids first European experience. Expose them to different settings and they will catch the lifetime travel adventure bug.

Whatever you choose to do, have a wonderful time!