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There are a few simple steps to taking great photos of kids.

1. Get in close. If you’re so far away that the kid is not the most dominant part of the photo then it’s not going to work – as a photo of your kid at least. Bonus to getting in close, if you need to use the flash it’ll work better. Keep in mind that built in flashes are only good for about 10-15 feet, after that they’ll ruin your pictures.
2. Take a lot of photos. For the photo at the top, it’s the 5th of 5 photos I took.  Chances are you won’t be able to predict when just the right pose or smile or whatever is going to happen. Take a lot of photos and you have a much better chance of getting exactly what you’re going for. Bonus with digital is that you can take a ton of photos and not have to pay for it.
3. Have good equipment. You don’t need the $5000 camera with an equally expensive lens to take a great photo, but having good equipment definitely helps.  A base model DSLR like the Nikon D3100 or Canon Digital Rebel will work fine. If possible get a 50mm lens with a minimum aperture of f/1.8 or less. (Hat tip to Alex Lindsay for the 50mm suggestion). If you’re not into getting a DSLR, be sure to have a camera that allows you to choose focus points and/or aperture (preferably both).
4. Focus point and aperture matters. Put your camera in aperture priority mode (“A” on Nikon or “AV” on Canon) and set it as close to f/2 as you can get. Then put your focus point on the eyes.

If you do those things, then you have an excellent chance of getting a great photo of your kids. I think they also work with adults, but they’re more likely to punch you for taking too many pictures of them.