It depends on what your kids like and your resources (how much are you willing to spend in other words

).
At this point if you're going to get a brand new console I'd go with an Xbox360 or a Wii. The Playstation 3 is just as fun as the other two but it costs more and most of the games on it are begin released on the 360 as well.
Best advice I can give you is; Find out which games your kids want and find out which system has them. For example there is no point in getting a PS3 imho if your kids aren't into games like Gran Turismo and Metal Gear Solid (both are usually released on Sony consoles). If they're all about Halo get the 360.... If Smash Brothers is their thing get the Wii.
If I were shopping for kids I'd go for the Wii and get plenty of "Wii Points". The Wii Points can be spent by yours kids on games which can be downloaded via the internet. I'd also buy one or two new games for them...I'll leave that up to you! The new guitar hero was just released though so investing in that might be good if your kids like guitar hero.
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Do you have a game system? Which one do you like and why?
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Too many to list! The ones I play most often are; The PS2, Gamecube, N64, Sega Dreamcast, Sega Saturn, Neo-Geo, NES, SNES, Sega Genesis, Sega 32X and my gameboy color. I plan on buying the Wii, xbox360, and PS3 at some point this year... I kinda got screwed waiting around on the PS3 to drop in price. Now I'm going to have to find an older one that'll emulate PS2 games in hardware.
BTW: If the HDD was the only thing wrong with that Xbox I would have been willing to buy it from you. Next time something breaks and you can't send it back send me a PM...I _always_ need parts.