setup a proxy server (squid and SARG) and pipe their net connection through it -then you have an exact log of what sites they visited and the times

we use that to restrict/monitor our computer labs

we have also used a piece of software called desktop detective that works quite well. Its not free but its not expensive -contrary to what youd think by reading the google results it os NOT malware but it IS SPYware. you can make it send reports/screenshots to you via email or if you can connect by ip to the machine directly, you can view the activity real time and see a screenshot every few seconds.

there site used to be http://www.bitlogic.co.uk/ but it looks like they might be defunct

You may want to look at using something like Windows Steady State, DeepFreeze or some other software to reset things when stuff gets messed up. Also, at least some form of filtering would probably be good. You might also want to look at using some level of group policies.