Well the DS or not discussion lasted a while, but in the end I took the advice of one of my friends who commented on the original post. I asked the kids if they wanted a new electronic device enough to spend their own money to buy it. Both kids have really never spent much of their birthday or Christmas money from grandparents. It's just been sitting in their piggy bank for the last several years. I think they still don't have much of a concept of money and consequently haven't asked to spend it. So when they went to count what they had, both kids had enough (along with a $30 Fred Meyer coupon that was in the paper) to buy the device they wanted.
Son has been a big Nintendo fan for a while and loves Mario and company. So his choice was the new 25th anniversary DSi that comes with a Mario Cart game. After I explained the different devices out there right now, Daughter chose an iPod Touch. I downloaded a bunch of free games and apps for her, and she's in heaven. I think she would have gotten bored with the DS sooner than the iPod, and I think son would have dropped an iPod touch and broken it on day one. So both made good choices for them. And I think having them use their own money was the correct choice as well. I'm still not sure they have a grasp of the concept of money, but I think they felt some pride in being able to use money they've saved to buy something they wanted.