Please put your equation between [ tex] and [ /tex] tags so it's easier to read.
Your equation isn't quite right. It's better if you approach this systematically. The total energy of the system is given by
[tex]E = m_1gh_1+m_2gh_2+\frac{1}{2}m_1v_1^2+\frac{1}{2}m_2 v_2^2+\frac{1}{2}I\omega^2[/tex]
That's just the potential energies of the two masses plus the kinetic energies of the two masses and the pulley. Now conservation of energy says that [itex]E_i = E_f[/itex]. Each side of the equation will initially have the five terms. On the LHS, the heights and velocities will be their initial values, and on the RHS, you will have their final values. Some terms you will be able to erase because they're zero. At this point, you'll have the equation you were trying to write down earlier.
Now, as you already noted, you still have too many unknowns. Think about how the velocities of mass 1 and mass 2 are related. And how do they relate to the angular speed of the pulley?