Kate Wicker hit a nerve it seems in this article and this post about bringing kids to church. If you haven't read them yet you should. They were very timely for me, since the more submerged into toddlerhood my daughter becomes the more I wonder about if I'm too slack at Mass. I also wonder if I'll be able to manage daily Mass with L and a newborn.
In general I believe that a 4-5 year old should be able to sit quietly for about an hour, especially if they are being encouraged to participate in the Mass via a children's missal, singing the songs, standing, kneeling and sitting and the family is sitting near the front so the kids can see the action at the altar. I believe that by this age they shouldn't need anything to eat or drink, though they may still need to go to the bathroom. Older kids, though, should be taught that there will be no bathroom breaks during Mass.
I think that for a baby / toddler soft toys and books are completely okay. But I don't think toys, crayons, etc (anything but books) are okay for a small child.
When it comes to L, I allow her to walk around a bit in the pew, as long as she doesn't go out into the aisles. I let her stand on the kneeler and crawl around a bit. Generally books are enough to keep her happy. BUT I'm worried that I'm not laying a good foundation for what I'm going to