I loved reading this aloud to my seven-year-old. Although I think some of the language is a bit dated and terribly British, the story itself is even more magical than I remembered from the first time I read it (probably about thirty years ago).
Far from being a simple morality tale for children, this is a surprisingly subversive story. Bilbo's character development, apart from the plot, was extraordinary, and he may be the frumpiest literary character I have ever fallen in love with. Initially underestimated by the strong and stoic dwarves, he goes on to save his troop from several disasters, not by discovering his heroic and invincible inner Captain America, but by being the small, quiet, resourceful person that he is. In fact, I would say that this is an anti-superhero story. Everyone who accepts the mantle of leadership in this book turns out to be deeply -- and, in most cases, irredeemably -- flawed. Bilbo, on the other hand, never loses sight of his own goal, which is to return to his lovely home. And by keeping his goal (and not his glory) in mind, he is able not only to overcome his team's obstacles, but to recognize when his team has lost sight of its goals and is no longer doing the right thing. And then he betrays the people by whose side he has fought for the whole book, even though he is not certain he is altogether right to do so. This book is an adventure story about a great quest and several great battles, and yet at the end, there is no conquering hero to celebrate. This tone probably came from Tolkein's experiences in World War I, and is still very refreshing given the current state of kid culture.
I think this makes the book much more relatable to most of us who are not superhero-like, but especially to children who are, like hobbits, smaller, quieter, and less apparently competent than adults. The message of this book is that the greatness you have in you is not something that will come to you later when you gain adult strength and size, but rather a quality that you have right now, in your present humble form. It was really hard not to love Bilbo.
That being said, this book is a relic of its time, and that was a time when sexism was so natural they didn't have a word for it and racial essentialism was considered to be scientifically supportable. I struggled to convert "men" into "people" as often as I could as I read, and I cringed a bit whenever the prose dipped into an "elves are from Venus, dwarves are from Mars" style of thinking. This is a problem in Fantasy that didn't start with Tolkein and certainly hasn't ended yet, and I'm looking forward to discussing the problems of substituting different mythical beings for different human races with my co-reader when she is older.