Shane,
Windows control:
Allow dhcp to assign the gateway, or set it static so internet works. Then use gpedit.msc to 1) set a bogus proxy server ( I use 'noproxy' name and use no port number). 2) Make your white list in 'Exceptions' for your proxy settings. 3) In gpedit, you must also set administrative templates\windows components\internet explorer to NOT allow the proxy to be changed.
I am assuming XP Pro (2k works the same) and your children do not have admin logon accounts or rights. Be aware other non MS software that contains a web browser may not respect the gpedit proxy rules. Also, if your children ever boot the PC with knoppix, they will have complete internet access.
SME addons:
Research squidguard and SARG which can allow you to ban all internet by defining a,e,i,o,u & 0-9 as untrusted expressions which will block everything. The white list is then created by adding domains to the trusted domains in squidguard server manager. SARG provides the ability to review all web sites accessed through squid by the ip address to audit the squid logs in an easy to read http report. Squidguard allows you to define IP address that are allowed to access everything so the parents can surf without restrictions.
By the way, if your children develop technical skills, you can expect problems. I setup internet blocking software on a XP home.....the 12 year old ended up getting around it by installing a second nic in the machine. The blocking software was bound only to the orginal nic. The kid simply moved the cat5 cable when he wanted to surf 'everything'. His dad asked me to check it out and I quickly discovered the second nic which was not present when the blocking software was installed. So, the best bet is to use SME in a locked cabinet with the cable modem and switch/wireless equipment. Users/kids that can't physically access SME will be forced to adhere to its rules....unless they tap the neighbors wireless device!!!
good luck,
ryan