iPods can handle books. They have a function called 'Notes' which displays text files. A text file is what you have when you write in a program like 'Notepad' on a Windows computer. It's just plain text and no other fancy formatting. This keeps the size of the file very small.
There are several websites that let you legally download classic stories such as Moby Dick or the Adventures of Sherlock Holmes. These are downloadable as text files and can be put onto your iPod as long as it has the 'Notes' function and I think they all do - even the first generation Nano.
One such website is called Project Gutenburg which boasts 30,000 titles. The thing about the Notes function is that they all have to be no bigger than 4kb. So this means once you download your text file, you have to truncate it into smaller text files. eBook Hood does this for you, and it's free as well. Once you have unpacked the zip file that it makes, you can easily transfer them into the Notes directory on the iPod.
I think books will never go out of existence, but I also believe this new generation of children - especially the ones that are wavering in their literacy skills - need options that also embrace the technology with which they are so enamoured.
Kids can also type their own To Do Lists, Homework Assignments or even Goals for 2010 as Notes. Poems, passages and other things that they need to memorise are a good use of Notes too. This is a very easy way to make learning and reading fun.