I have this little project...

My grandparents have Win98, and go ok, but AAAALLL their friends run OSX and can't shut up about it.

Id go with Windows, Put Adaware or something on to run at startup, non IE browser, and maybe lock down the permissions via policy etc so she cant cause too much damage.
 
yeah.. linux with a limited x windows install.. 2 big buttons that say "Email" and "Internet"..

no frills..

though, I think the MSN tv box thing is the best idea.. She would prolly feel better about using the TV instead of the laptop.. The whole concept of using a computer is so vague for older people.. its best if you "take away" the computer.. Give me the laptop and buy her the MSN box..