Look, I'm as worried as the next guy when I give my kid my iP*d to play with. They always come back covered in jam and nearly broken but I love my kids and if they want to watch Surprised Kitten over and over, let them. But I don't want to feel that they have my iStuff enough to require a freaking fluffy case with built-in speakers and batteries. That's just too much.
Well you know who wants to ruin our kids forever? Griffin. They made the Woogie, a soft, plush case for the iPod Touch and iPhone. It costs $20 so you may want to try to make your own protection by, say, supervising your loinspawn and limiting their time with your iPhone.