Hi G.,
I too had heard and read that the photo quality wasn't great. We went ahead and got it for my 4 year old son last year.
First of all, he loves it (as does his 2 year old brother) and they take all sorts of fun pictures. Once uploaded, I was pleasantly surprised at how "not horrible" the quality was. Perhaps, I had low expectations and we do have a lot of light (natural and otherwise) in our house. It wasn't that bad, but like the other mom said, its really about taking pictures rather than seeing them in prints or on the computer.
As a side note, we went on vacation over the summer with my entire family and have nieces who are 7 and 8 and they too loved playing with the camera, so I see that (hopefully) this is something that they will want to play with for a while.
I like it a lot and like the idea (and TOUGHNESS) of it. I am very satisfied with our purchase.
Have fun!
B.