My kids, 6 and 3, use a hand-me-down white MacBook. The machine has been tarded up appropriately to stop them from breaking things (Simple Finder, Parental Control locks on Safari for whitelisted sites only, no IM, admin password unknown to children required to change any setting).
They are not allowed to eat or drink while at the computer, and the computer is not to be moved from its desk.
Within these constraints, they have a ball. The machine is loaded up with all their favourite movies (one click on pictographic icon launches VLC in fullscreen mode), and the sites where they play games (TVOntario Kids, BBC Kids, etc.) are bookmarked.
My 6 year old can videoconference with GTalk with my wife and I elsewhere in the house, but cannot initiate chats outside of the LAN. My 3 year old hasn't quite got the hang of negotiating the necessary dialogue boxes yet, but he'll pick it up soon.
We haven't bought much in the way of educational software, since the process of separating the wheat from the chaff is too labour intensive (most of it sucks the proverbial wang). We make do with web sites (like
I Love Bacteria) and educational Flash games.
Hope this helps!