My son has been using the KidZui extension for firefox for about a year now. He loves it. Has the freedom to browse and explore at his own pace. Never has he gotten anywhere even close to inappropriate. After seeing what my niece has gotten into after being let browse youtube I insisted my sister install it on her computer as well. The most important thing is to set boundaries for you kids but to let them explore inside those boundaries on their own so they can learn (maybe even push them a little, I know I did). I'm sick of people holding their kids hands through life, kids need to learn on their own and fail on their own. Observe and supervise, but let kids be kids. You are not their best friend, the kid at the park should be.

Last I checked (2 years ago) there were already tons of products out there that already do this. Personally I let my son on the net with a firefox extension called KidZui, all pre-approved content and with enough freedom to browse so he feels in charge. Kids need freedom to grow, you can't be watching their every move all day. Unless you want to stifle all your kids development and personality. Set boundaries and guidelines and stick to them, then let them explore.