If I were to setup a computer for a kid I would most likely go with a virtualization application.
Here is a quick setup for a kid :
Avast 7 Free +
BufferZone Pro +
Norton DNS (You can setup the parental controls with this DNS) ... a Limited user account would be a good option while it can be annoying sometimes,it's definitely a solid layer of protection.
Here is BufferZone at work:
Other products that can be run with Avast Free would be
GessWall or
Returnil both have free versions which can be used... nevertheless I still like BufferZone Pro better
I've tried to suggest a free security setup however if you have a 32bit system and some money to spare , DefenseWall or ShadowDefender are also great options.