V.W.
I would go with a Nook color. I have a Kindle, and while it is exactly what I wanted and it works great for me (I only want to read books on it and did NOT want backlighting), if you are wanting multi-use functionality (games for the kids) then you will want to go with the Nook. Yes it is possible to go online on the Kindle, but it is a bit of a pain, and you don't have full functionality--you can read stuff, but not do games. There ARE games for the Kindle (word games mostly) but it is not a touch screen, so playing them is labor intensive compared to other technology available out there.
If you want something to just read books on, keep many books easily portable, and not bells and whistles galore, then a Kindle is great. If you want more, then don't get a kindle or you will be disappointed and frustrated. Not dissing Kindles (again, I love mine!) but be aware of its limitations and what exactly you are looking for in a product. It doesn't sound to me like a Kindle suits what you are after.
I don't own a Nook, but I know several people who do, and from what I understand they are more what you are looking for (online capability, touch screen and color).