So, I'm reading The Hobbit to my 5 year old and she LOVES it. OK, let's back-up a step...
The other day, my wife left one of the Harry Potter books lying on the table because she's loaning it to a friend. Anyway, my daughter was flipping through it and I was like "Hey, you like Harry Potter? Should I read it to you?" and I was surprised at the very enthusiastic YEAH! Please please please!
Then I was like "Wait, isn't that book full of high-school crushes and flirting, maybe when she's older" so I was like "How about I read you The Hobbit?" my mother read it to me when I was a kid.
The Hobbit as a Kid's Book
I remember a lecture at The Tolkien Professor where he was explaining how The Hobbit is written to entertain kids, specifically Tolkien's kids, more than to be a realistic story. The example he gave was how the Dwarves all suddenly pull out impractically large instruments, including "violes as big as themselves", and then these instruments are never heard from again.
As for my daughter, she was REALLY excited that the protagonist is an adult who is nonetheless about her height(being a hobbit). The same can be said for the Dwarves, and also she was excited about them because she just watched Snow White and the Seven Dwarves. And the fact that there's a magician.
In any case, that really struck me, that she's excited about Bilbo because she identifies with him. She even got mixed up and told me excitedly one night "he's my age!" In that light, the story can be seen as an adult(Gandalf) who sends a kid(Bilbo) off on an exciting and important task, with minimal adult supervision, and he ultimately rises to the task.
Anyway, I'm sure we won't make it too far into the book this time around. The vocabulary is really too difficult for a 5-year-old, and you can only go so far on enthusiasm alone. Maybe I'll look for the animated movie from the 70's, although I remember finding it a little too trippy and confusing as a kid, too...