A couple of years back, I handed my digital camera to my 5 year old niece at a wedding. I didn't see it again for a couple of hours.
After I tracked it down, I watched her play with it for a while. She was having the greatest time just running up to people and snapping their picture, then gazing at the picture she took on the LCD. I had the thought that someone needed to manufacture a kids camera with absolutely no bells or whistles*. Just a lens, ccd, flash, screen, button, and battery in a tough case. No storage memory needed, because all you need is to display the picture until the next one is taken. Put a big LCD on the back, and a nice huge battery in it, since the LCD and associated light will be on all the time, and you're golden. I've seen a lot of cheap digital cameras, but I'm kind of surprised that nobody has seized upon this concept for the preschool set.
I was glad that my camera had a nice big card in it, though, because when I dumped the card, I found she had actually taken a lot of nice pictures. And, I ended up with a lot of pictures of people that I might not have thought necessary to get to pose otherwise.
-Aaron
*unless kids are into actual literal bells and/or whistles these days.