I would pick the west side of Madison for sure. We currently live in Sun Prairie (east side of Madison) and I feel like I am constantly driving 20-30 minutes to the west side for one thing or the other.
Middleton is your safest bet school-wise--if you can afford it, parts can be pricey. Madison has some beautiful and fun neighborhoods such as Nakoma, Monroe street, and Vilas, but the schools don't always rate that well unless you go private. Do your research on
GreatSchools.net for more info on the schools.
A couple of reasonable and nice family-oriented areas with good schools are Verona and Fitchburg. They are on the Southwest side of Madison. My sister lives in Fitchburg and has a daughter in 5 year old soccer. She has been very happy with the area.
You mentioned Shorewood and how expensive it is. Yes, that is a great little village in itself with its own "international" elementary, swim pool, country club, and perfect location for getting to downtown, shopping, or walking at Picnic Point/Lakeshore path. The houses are very pricey (and mostly small) but you are really paying for a wonderful location and great schools. My first choice for living in Madison would be Shorewood because of the location and top rated school chain (Shorewood elementary, Hamilton Middle, and West High) but I just can't convince my husband to shell out 500K for 1700 sq ft!
You do pay more to live on the west side of Madison, and I have nothing against smaller outlying towns such as Sun Prairie and Marshall, but as long as you are making such a big move you may want to have easier access to Madison itself. It has so many fun things to do as families and most of those are easier accessed from the west side.
Consider resale options if that is something you need to worry about down the road. Sun Prairie has amazing deals on very nice houses but there is so much land out here there is a glutton of homes for sale and resale is much slower (if you can believe it could get any slower...)
Of course, you may want to figure out where your job/jobs will be. One reason we live in Sun Prairie is b/c my husband works at American Family on the east side. The commute from east to west or west to east is done mainly by what we call the "Beltline" and that can take you around 45 minutes if not more.