Stopping kids from using a machine for illegal activites?
Solution 1:
Try OpenDNS. You can set up your Internet connection so it filters everything through them. Free accounts for personal use. I use it at home.
Solution 2:
For Windows XP, the easiest thing to set up is Content restrictions.
Go in to Control Panel
> Internet Options
> Content
tab then enable and set the restrictions you like.
This however only works on Internet Explorer.
Next, I would advise you take a look at OpenDNS. If you are willing to change your DNS provider (and OpenDNS are a very good and fast one), they offer free content protection which will work for every browser and machine on your network.
So, you have an easy and harder option here, use whatever one you want!
Fool proof - unfortunately not, you can overwrite anything - you may have a bit of luck if you go down the extreme route of blocking all DNS queries on your router other than to OpenDNS, or similar, but if the kids are intelligent, they will find a way!
Speed, It shouldn't affect it negatively at all.
3rd party software - there are far too many to mention, but I prefer the ones I listed above.