A great Knitting book for kids is Kids Learn to Knit by Lucinda Guy and Francois Hall.
From book description:
"Learning to knit can be enormous fun for five-to-ten-year-olds - especially when helped along by frisky animal characters whose antics make each lesson a delight."
From the inside cover:
"Using simple language and witty animal characters, each stage of knitting is set out in a series of lessons; each lesson is then followed by a project to try out new skills."
It has great illustrations and directions. Projects include:
Knit-stitch flag (basically a small garter stitch square with a felt start sewn on)
Happy Herbie (a small dog that is really cute)
Hooting Henry (a stockinette stitch owl)
Striped Garter Scarf
Knitted Book Cover (I may make one of these for myself!)
Flitting Flo (a butterfly to practice decreasing and increasing)
All-Together Bag (it uses all the stitches and techniques in the book and is another project I may have to do myself)