I see that this forum is not used much, but, I am a parent who has a few questions and am not sure where I can ask them.

First, the background:
I have 2 kids, a son almost 10 and a daughter 7. They have been playing piano for 1 and 1/2 years now. Their teacher is using the Piano Adventures series, and my son is half way through 3A. My daughter is going a little bit slower (the keyboard is harder for her tiny hands) and is in 2B.

They practice approximately 30 minutes a day 5 days a week. My wife has some music background and is able to sit with them 3 times a week to insure they are doing it correctly.

We use a digital piano, and I "feel" it is a better choice since we can use the accompaniment MIDI disks to help them get the "feel" of the music.

My son's teacher has told us that he is doing so well that he should consider playing a second instrument.

This has brought to my mind, a multitude of questions because I don't understand the music development of a student.

The questions:
1) Why is it bad to play by ear? My nephew never learned to read music, yet he is the life of a party, able to play most any song, and able to create songs. That is the direction I'd love my son to take. Does the formal training teach those skills? and if not, how do I get him that training?
2) Do other instruments truely provide a benefit I'm missing? I am more interested in my son learning "pratical" instruments that will be used throughout his life, i.e. piano, guitar or something he could play in church. I don't really see him in an orchistra or as a professional pianist.
3) Back to question 1, wouldn't playing by ear keep the child interested longer? I see so many people who quit piano after 2, 4, 9, etc. years. They still can't really play because they haven't practiced a song and don't have the music. Wouldn't the ability to play by ear alleviate that?
4) What is the difference between classical training, and other forms of training? And does it matter which you do?

I don't really want to ask their teacher, because I don't want to offend her, I'm not sure if she could answer me, etc. etc. She's not very informative either.

I'm happy with the progress so far, but I wonder what path it should be taking.

Sorry for the length of this post, and thanks for your reply.