I like to upgrade my iPhone each year, so I pass my old iPhones to my kids. My youngest has had an iPhone since she was 4, firstly a 3G & now a 3GS. My older daughter has had a few as well. She is now 10 & has an iPhone 4. The youngest uses hers on wifi & it has no sim card. For only $10 per month, the oldest has a sim with 1GB data & free txt since the family all have iPhones & she has iMessage. (This is a deal via my employer). I wasn't going to recoup enough money from selling the iPhones & then pay for each of them to get an iPod Touch, so it was actually cheaper for me to give them the iPhones. Besides, when my oldest goes to my parents place over the school holidays, she can take a sim card. She uses it to txt me that she would like to talk & I call her back when I can.
The added benefit for me is that when I get further long with my iPhone app development, I will still have the older devices for testing as well as my current device.
The iPhone also helped my youngest daughter to learn to read before she started school. I am surprised that people are quickly to judge parents who let kids have iPhones, there have been many benefits in our household.