You might want to consider a used color PDA, either PocketPC or Palm-based, and just install MobiReader (and/or MSReader). Advantage being small size, color for graphics, plus gaming and media capabilities on the side. Downside: daily recharging.
Of the eink readers you could go cheap, with the ebookwise which runs around US$100 new or the Jetbook lite which runs under US$150 and has been on sale for US$99, or you could go small/light but higher-priced, with the Sony 300, Booken Opus, or the Pocketbook 360 (my reader of choice) which comes with a smap-on hard cover to protect it. All have separate forums round these parts so you can inquire about kid-friendliness.
Alternately, you could go for one of the various MID devices running WinCE, Linux, or whatever, that feature color and internet capabilities in 5-7 in sizes for around $US200 but are likely to be more "computerish" to deal with.
Don't know if the schedule would let you wait for Nintendo's upcoming ebook collection for their DS that turns it into an ebook reader or if you'd be willing to configure a Nintendo DS to run dsLibris:
http://rhaleblian.wordpress.com/dsli...e-nintendo-ds/
When faced with a similar choice for a 10year old a couple years back, I went with the ebookwise but that was two years ago; lots more options today. Given the budget (it's hardly cheap) and the certainty that the kid would take care of it, I'd go with the pearlescent white PB360 with the (Optional) "Beauty" theme but I'm biased.
http://pocketbook-diary.blogspot.com...ocketbook.html