As an IT Security professional and a father, I'm often asked how to filter the internet for their children. I would suggest there are three elements that need to be looked at including IT security, education and computer location.
My children use a Windows 7 computer, but in order to secure the system, I run Avira Internet Security 2012, which is a lightweight, low footprint but highly effective anti-virus software. It offers anti-malware, a software firewall and a basic level of web filtering. I ensure all these components are enabled, updated and running. I have created limited access Windows user accounts for the children, where no administrative rights are available.
Everyone assumes that controlling the computer or access to the internet is the answer, but your children need to understand why they are in place. We have spoken to the children that if they encounter anything that they did not expect, then they should make us aware of it. We have also spoken about password security to them, to ensure that the passwords they use are not shared with anyone beyond the family.
Some people are surprised with the final piece of advice, but I suggest putting the computer, or using the laptop in a high traffic area of the house. Some recent research has shown that paedophiles are less likely to engage in a webcam chat, if it is in a family area of the house, compared to a bedroom. We have situated the desktop computer in the kitchen, where the children are rarely using the computer unsupervised.
Some think this attitude may be a little paranoid, but the key component is education and for your children to understand why.
Thanks to Jason Jones for pointing out this Ofsted report, which makes for some interesting further reading.