We took Emily when she was 4 1/2. We talked to her about it beforehand, telling her it was scary but it was a show, just like Beauty and the Beast and the Lion King show. We told her that it would be loud, dark, late, and scary, but that she would be safe, nothing would happen to her, and she would enjoy it. We also made sure she got a little nap in that afternoon.
We did the dinner package (more information is available on the Restaurants board), enjoyed the buffet and Hollywood and Vine, explored the park and shopped for a bit, then went in the back way, found some good seats, and waited about 35 minutes for the show to start. That was the roughest part of it for her.
The verdict: not only did she love it, (covering her ears when it got loud, leaning into me when it got scary, then pushing me away when it was OK, and finally jumping up and down, laughing, cheering and clapping at the end when Mickey wins out), but the couple behind us told us that they had been watching her as much as the show and that she was their favorite part of the show!
Again, a little preparation never hurts. Let them know what to expect. In fact, reassuring her on this issue and dealing with her fears of the furry characters led me to what is now my Disney Mantra: "Everything at DisneyWorld is pretend, EXCEPT THE MONEY!"
I think that expresses it pretty well.