We had a great time with our 2 1/2 and 3 1/2 year old last year.
Our 3 1/2 year old was not comfortable with the characters - but quickly reached a "Mom wants to take a picture, I'll stand three feet away from you, won't look at you, and you won't touch me" accomodation. He did like looking at them - particularly during the parades, interacting was too much. My 2 1/2 year old treated them like large stuffed animals.
We stuck to the non-scary rides. We did get on Pirates - my son sitting between Grandpa and Dad - he was nervous about it. We tried the Haunted Mansion but didn't make it through the doors. We did Universe of Energy at Epcot, and he did go on the Norway ride (also seated between Grandpa and Dad and was a little scared). We pretty much stuck to the Fantasyland type stuff at MK. I've never taken a trip where I've spent so much time in Fantasyland. But there was plenty to do at almost all the parks (and they don't tire of riding Small World over and over and over again).
You may have to be willing to split up a little - especially if your seven year old is the type that will want to ride Space Mountain.