Love all these ideas! Thanks everyone for sharing...
One scrapbooking idea I've been itching to make for my daughter is a photo album of loved ones.
Piggy-backing on the scrapbook idea: I made an ABC album for my son with one page for each letter of the alphabet and a photo that goes with it. "A is for Aunts" and I put a photo of each aunt. He loved it when he was 2 and even more now that he is older.
Another idea I have is for a simple drawstring bag to hold toys in. The key is to use fabric that the kid really likes. (Of course, we need to be careful of strings around small kids...I keep mine super short.) This has been a big hit with 2 and 3 year olds.