WOW ! visiting after so many days and seeing such a healthy discussion.. cool.. seeing all pros and cons, m still confused.. you people have good reasoning skills !!
i use ipod touch and samsung wave..on wave i have mtnl 3g so i enable tethering wifi on my phone..so i am able to browse use apps on ipod too via the wifi tethering on-the-go...deadly combination would be an android phone plus ipod touch.
If audio quality is something that's important to you, then pick the iPhone 3GS over the Touch. The 3GS has a better DAC than the 2g touch but I haven't used the 3g touch so take my comment with a grain of salt.