My kids like playing on webkinz.com, nickjr.com, etc.
My daughter loves www.webkinz.com and www.nickjr.com too. We've also enjoyed www.starfall.com a lot. It really is great for helping with sounds and reading.
There is also www.funbrain.com and http://funschool.kaboose.com
I didn't know about www.highlightskids.com or clubpenguin.com before. I'll have to check 'em out! I can't believe I haven't visited hightlightskids.com before--we get some of their publications.
There is a special browser for kids. It's called KidZui. Goto www.kidzui.com and download and install it like a regular browser. The difference is that it's a kid-safe browser and only kid-safe sites can be accessed through it. Sites that are submitted go through an approval process then kids can surf them, play games, etc. There is a free version of KidZui and a subscription (pay) version. We've only used the free version right now, but it's been just fine. My daughter really likes it because she can keep all her favorite sites there and gets to build and name a little character to go with her account.