Hi OP!!!
I have been vacationing in Newport Beach, CA nearly every year since childhood and I highly recommend it! Our three boys are ages pre-school to pre-teen and they love it. We've been in both the summer and the off-season, and I agree with the previous posters that the water is very cold in December! But we bundle up and the kids can dig in the sand.
Newport has so many great spots for small children. Here's a list:
1) For digging in the sand and running on the beach, I'd suggest parking near 15th Street on the Newport peninsula. You'll find public restrooms, a great burger spot called the Stuft Surfer (picnic tables on the sand in front - our kids start to dig in the sand while we finish lunch), the 15th Street Surf shop and Fry's Market (for sand toys.) The playground on the sand at 13th Street in front of Newport Elementary is a perfect place for little kids to play. We also like this area because the sand is not right next to a parking lot or busy street. Of course, we have to be careful that the kids don't get in the way of cyclists on the sidewalk/boardwalk, but the beach is very wide and very uncrowded so we always have plenty of space (and time to catch running little ones!)
2) If you continue down the peninsula, you'll find the Balboa Fun Zone with arcades, a ferris wheel and several shops. Ruby's restaurant is out at the end of the Balboa Pier and has great food in a very fun atmosphere. The kids' meals come in cardboard cars, which has always been a hit with our boys! We prefer the Balboa Pier area to the Newport Pier area for little kids.
3) From the Balboa Fun Zone, you can take the auto ferry across to Balboa Island. (The ferry charges different rates for cars, pedestrians and people with bikes.) When you get off the ferry, you can either walk along the sidewalk that hugs the perimeter of the island or drive to Marine Avenue. The walk along the perimeter is great because bicycles are not permitted, making it safe for little ones to walk. Marine Avenue has several shops and restaurants, but the big draws for our kids are the toy shop and the candy store. Our boys also love the frozen bananas and treats from Dad's Donuts.
Hope this helps - have a great trip!!
