I've been gaming a lot lately on my iPod Touch (1st Gen, 8GB) and I give it about one more year before the DS and PSP can't hold a candle to this thing. The hardware is better the GUI is better and the feature set is better. It's just a matter of waiting for the gaming library to catch up and it's gaining ground fast.
What kinds of games are you playing? I was considering picking up a Touch, but I've heard that they're mostly small puzzle games and such. Those don't really hold a candle to Nintendo first-party titles, AAA 3rd-party stuff, and all the massive PS2/PSX games on the PSP.