We are thinking about getting our kids a computer to replace the, now, non-functional iBook that they used to use. Qimo looks interesting for our kids. Qimo is a Linux distribution that has been customized for kids 3 and older. The launcher has been customized to have larger icons, and comes preinstalled with games for kids.
You can run Qimo from the CD, so I will probably check it out before installing it. One thing that I hope to be able to find is a modified browser where I can specify the sites where they can go, and it will ask for a password if attempting to navigate anywhere else.