Many thanks to those that answered my questions as I planned this trip. We had an amazing time. Just in case anyone else is looking for ideas - here's a recap of what we did and tips for what worked for us.
The Swiss Travel Pass with the Swiss Family Card was a good value for us, I used the spreadsheets here on MySwissAlps to price it out. And with 2 children under 10, the ability to hop on a bus or train as needed was fantastic. I was nervous about how to use the STP on buses in cities where it was valid, thinking I'd have to buy a bus ticket somewhere, but by asking we found out that all we needed to do was have it with us when we boarded the bus.
Tips: Download the SBB timetable App before you go - it was a fantastic tool on a daily basis and had some good features for saving planned trips so you can check times even off-line. We bought 10 day SIM cards at Swisscom when we arrived in Luzern, which provided all the data we needed. We did run into one instance where our train was delayed and we missed a connection, from Milan, Italy to Arth-Goldau, but luckily the trains run so often and to so many places we were able to easily adjust. FYI - for traveling in from Italy, we bought a ticket from Milan to Chiasso and then purchase a seat reservation only from Chiasso to Arth-Goldau since we had an STP, but there was enough space on the train that we didn't have to change coaches.
In Luzern we walked through the old town, climbed the watch towers and walked along the old city walls. We also went to the Gleitschergarten museum, which was free with our STP, and saw the Lion Monument. We also took the train around the lake to Brunnen where we assembled our own swiss army knives at the Victronix store/visitors center. The boat on Lake Lucerne would have been an option to get there as well, but takes much longer. We did book that about 2 weeks before we left. But they made amazing souvenirs for our two boys. We had hoped to get to the Lido or another beach at Luzern, but the weather didn't cooperate.
From Luzern we enjoyed immensely a trip to Titlis, one of the highlights of our trip was the snowball fight and snowtubing we enjoyed. The weather was rainy in Engleberg, but we checked the webcams and went up to Titlis anyway and were treated with wonderful views and sunshine before the bad weather caught up with us. We stopped at Trubsee on the way down and took a spin in a rowboat. The poor weather actually probably made the trip more fun, because we felt like we had Trubsee to ourselves. Our final trip from Luzern was a Golden Round Trip to Pilatus. We walked to flower trail, which provided wonderful vistas, and got to see an Ibex! As a bonus we all loved the ropes course at Frakmuntegg on the way back down. I highly recommend it. We didn't push ourselves, so we only did one thing most days and tried to get the most out of each location.
Due to weather we hopped right back on the train when we got back from Pilatus and headed to Lauterbrunnen. We put our luggage in the lockers at the Luzern train station that morning which was very convenient.
In Lauterbrunnen there are so many wonderful options including just walking through the valley and viewing the various waterfalls. Schlithorn was ok, but not our favorite. It is clouded in most days by 10 am as far I could tell. But the James Bond museum was interesting. However the gondolas were so packed both up and down that it was probably our least favorite excursion. We much more preferred the time we spent at Almendhubel. The playground is really top-notch and the restaurant served a lovely lunch that felt perfect on the sunny deck with breathtaking views of the Monch, Eiger, and Jungfrau and field of alpine wildflowers. We enjoyed the walk back down to Murren, but didn't spend much time in the town itself, other than a little souvenir shopping.
We went up to Interlaken one day and went to St. Beatus Cave. I've been to many large caves, but the underground rivers in this one made it really interesting, and a good option for a hot day. The boat ride on the Thunersee was also very enjoyable, although we didn't leave enough time to explore any of the castles.
Probably our favorite trip was up to Wengen by train and then to Mannlichen by gondola. This was MUCH less crowded than going up to Murren and the views from Mannlichen are truly amazing. We hiked up the Royal Walk, enjoyed another wonderful playground, ate lunch at the restaurant, and then hiked the Panoramoweg to Kleine-Schiedigg where we caught a train back to Lauterbrunnen. We finished up the day at the community pool in Lauterbrunnen. Mannlichen has a good website with info about the different trail options, there are several from there.
I couldn't have planned this trip and itinerary without the great resources pulled together on this site - I got so many wonderful ideas by browsing the suggestions for different areas. For those with kids who are interested in hiking in the alps, the momstotszurich blog is another excellent resource. Happy trails!