If your kids have been gaming for a little while, then they likely have specific game series that they play. You might want to keep this in mind when purchasing a system, if you're going to go for a handheld gaming console that's made by one of the "traditional" console companies, such as Sony or Nintendo. Game titles that are on the Sony handheld may not be on the Nintendo handheld, and vice versa.
The iTouch? I don't know much about it, but how old are your kids? I have a sneaking suspicion that the type of games that would be on an iTouch are fairly simple, and may be viewed as being geared towards younger kids. Granted, us adults seem to be pretty entertained by shit as simple as Angry Birds, but if it's relatively complex games that your children would want, then I don't think the iTouch will satisfy them.
Now, they'll be able to do a wider variety of things on an iTouch, including various educational apps, so if you want something that's more than just a gaming console, then the iTouch would be better.
I would keep this in mind though: An iTouch is essentially a small computer. Unlike the DSi, PSP, or NGP, an iTouch will likely require a little bit of technical savvy (though probably not much), but most importantly, it may require a wireless connection for many of the programs/apps/games it runs. The more traditional gaming consoles are much more simpler to operate. Stick in a game and play it.
Additionally, because the traditional consoles are much simpler, they don't have a lot of the problems that you might encounter with an iTouch. Inappropriate online content, the possibility of screwing up important and sometimes complex settings on the device, the ability to remove important apps (or to install apps you wouldn't want them to have access to), etc.
Essentially, it boils down to this: Are your kids big gamers, and do they have certain titles/series that they enjoy playing? If so, then you're going to want to get whatever system has the most titles that they enjoy. Sony's not going to have Mario, and Nintendo's not going to have God of War (I have no clue if these are titles available on portable consoles; they're just examples).
Alternatively, if your kids aren't big gamers, don't follow particular titles/series, or you simply want to get them something that's going to be more multi-functional and not just a gaming console, then you'll probably want to go with an iTouch. Just be aware that the more functions a device has, the more that they can do, including things you may not want them doing, or things that will render the device temporarily FUBAR.