I second the option of a BayernTicket.

We were in Munich and Salzburg for 10 days over Christmas. Our base "camp" was at Munich, and we were planning to rent a car to see the castles as well as Salzburg.

We were happy we chose the BayernTicket. The trains are amazing, frequent, and fast. The price is very cheap too. 25 for 1 passenger and 29 for upto 5 people (Yes, 5 people can travel for 29). These were the prices in late 2008.

In terms of things to see, I didn't like Salzburg quite a bit. Yes, if you like Sound of Music, there are a few things to see there. If you venture a bit beyond Salzburg, you'll be rewarded with some awesome views.

Munich: Ton of things to see here. The Flight Museum is a good place to visit. So is the Auto museum, and a few other museums. The castles (Neuschweinstein and Hohenschwangau) are great places to go too. And then there are good beer gardens, restaurants etc.

We had stayed one night in Salzburg, and 5 in Munich, as we used Munich as our base location for venturing out.

Do try to get hotels near the train station (main or subway). You'll thank yourself for it later