You could always look into getting a Galaxy Nexus off contract or something of the sort, it would have plenty of internal storage and just be a larger iPod, however, depending on your kids' ages i would suggest just getting them the iPod, like others have said, i consider it a toy as well.
If they are old enough to be considering a phone in a year or 2 maybe grab an android that they can turn into a phone in a year or so
