http://www.befunky.com/ is a photo manipulation site and what I love about it is that there's no download onto your computer and no login so it's super easy to use. Here are a couple of projects my kids did.
I recommend this program for children as young as 4 or 5 because they can use mouse skills only to drag and drop stickers onto their pictures. Another skill they can learn is how to click on a "sticker" and find the corners to make it bigger or smaller. This will translate to lots of future computer programs and they'll have a ball doing it. The sky's the limit for older kids who can play with their photo and their artistic side to create all kinds of pictures. I've seen some very creative work done by 3rd through 5th graders. If your computer has a webcam let them take the picture sitting right there. Or you can use any picture that's already on your computer.
Be Funky is free although if you get hooked and you love it there is an option to buy the premium service which includes lots more options for each picture.