The DS games go on the top slot, the little one. I believe it has a "Slot 1" label on it, though its molded into the plastic and can be hard to see depending on your color. Any DS can play any DS game, though that will change when the 3DS comes out in a few months, so if you are buying games for your nephew pay attention to the packaging, as a normal DS will not be able to play a 3DS game.
The bottom slot plays games for the Gameboy Advance only. These can still be found used at Gamestop and other places that sell used games.
For both types of games I recommend reading game reviews from reputable sites like gamespot.com. A subscription to Nintendo Power could also be good as they cover both upcoming games and give good reviews of ones that are out. I recommend this because there are a lot of companies that make very cheaply made games with cute covers that look appealing in the store but are a waste of money once you go to play them. Just a quick googling of the game's title should give you a clue if it's worth your money or not.
As for the PSP, I suppose it depends on the age of your nephew. Honestly I am under the impression the system was a flop. I will preface this with the disclaimer I do not own one, but I've had the impression its fragile, has a massive screen which scratches at the drop of a hat, it has very poor battery life, and there are nearly no good games for it. There were two games ever I wanted, and neither was good enough to warrant my purchase of it. A lot of what is popular is older gamers buy rereleases of old games they played on their PS1's, but I imagine your nephew isn't old enough for that to matter. I really wouldn't recommend it though. If you still think you want to give it a go, I wouldn't get it for a kid under 9 or 10 or so, depending on how good he is with taking care of his electronics.
