Hi ChiTownGrl, welcome to the DIS!
I think character meals are definitely worth it. While you can find characters in the parks, there are often long lines and if you want to see certain characters you just have to hope you'll be lucky. At a character meal, the characters come to you and you know who you'll see depending on which meal you choose.
The food at most character meals, with a couple of exceptions, is buffet and it's usually pretty decent.
I've never gone with children the ages of yours, but if they like Pooh characters Crystal Palace in MK would be a good choice, with characters at breakfast, lunch and dinner. If they like Mickey and company, Chef Mickey's in the Contemporary would be good, with characters for breakfast or dinner.
As far as princesses go, if you are asking about Cinderella's Royal Table, only breakfast is a character meal, and that one is very hard to get. There is also a princess breakfast in Norway at Epcot.
1900 Park Faire has a princess dinner with Cinderella and Prince Charming.
And no, you don't have to be staying on property to enjoy any of these meals! Just call 90 days out from the date that you want to eat there to have the best chance of getting in to the one (or ones) that you choose.
If you want to see menus and pricing, try this site:
http://www.allearsnet.com/menu/menus.htm#res
Happy Planning!