I went there in 2001, so things may have changed quite a bit. We found that using Fast Passes was a wonderful way to cut down on wait times. Get a ticket, come back at the stated time, and you're on the ride sometimes in less than five minutes.
I did stay at Paradise Pier, but in hindsight, I agree with others that you can do just fine staying away from an actual Disney resort. We also stayed at the Hilton Anahiem which was very nice, and all the surrounding hotels have regular shuttle buses to the park.
Lastly, I'd say enjoy Downtown Disney, but resist the temptation to eat dinner there. Places like ESPN Zone and the Rainforest Cafe look cool, but you end up waiting a long time for a terrible, overpriced meal.
Also, some of my favourite aspects of southern California actually had nothing to do with Disney. Huntington Beach is a beautiful area with amazing restaurants, and it's great to watch the surfers from the pier. Laguna Beach also is quite cool.
Have a great trip!
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