My kids got an ipod touch for Christmas last year and it has been a constant companion for them during the past year. They were 9 and 11 when they got it. They love to play games and watch videos on it. It is easy to take places and discreet so they can play it and be quiet at a restaurant for example.
I will say that they have "lost" it a few times including it falling out of my son's pocket at a NASCAR race and luckily for him getting turned in by someone to lost and found. So if the kids are prone to losing things, you will want to keep a watchful eye.
My kids are even taking a photography class and using the ipods in the class. They are very versatile. I think the only downside would be the reading but maybe a kindle or nook would be better for that anyway.