The iPod Touch was a device which I was very much looking forward to. Oh, god, how it left me wanting.
Let's begin with the bread and butter of the device - the ability to play music. It can't even do that well. The sound quality is severely lacking on this, compared to the four Sony Walkman MP3 players I've owned, through the same headphones. Even the cheap B-series had better sound quality! Everything sounds like it's being played through a 1950s radio.
Then, usability. First, you are tied to iTunes (unless you hack it), which is the worst piece of software ever devised by the human race. I consider myself quite computer literate, but even I find iTunes to be a convoluted mess. And if you have a netbook - then forget this iPod right now. iTunes will slow it to a crawl, even when not in use. The usability of *most* of the player is decent enough - that is until you go into your music library. The iPod is unable to handle albums with multiple artists, so it's likely that you will be searching a long time before you find the song you want unless you use the search option. Each artist appears as his or her own album, so if you have a few compilation albums, then again stay away.
A few things that the player does do right, now. The screen is really very nice and excellent for videos - very sharp and with good contrast. Unfortunately, and videos have to be in strict 640 x 480 resolution and in MP4 format (which takes up a lot of unnecessary space compared to avi or mkv formats), so you're in for a lot of converting before you can actually watch any videos on the thing.
The only real advantage to this device over it's competitors is as a gaming device, but even then compared to the PSP and DS it is sorely lacking. There are a few good games available (I definitely recommend Chaos Rings and the ports of Final Fantasy I & II, plus some obscure stuff like Vay), but much of it is just pointless shovelware like an app that simulates throwing paper into a litter bin. It's insulting to put a price tag on some of that stuff.
To sum up, if you want an MP3/video player, look elsewhere - I suggest in the direction of Sony. If you want a gaming device, get a PSP or DSi (both of which can play music, incidentally).
The iPod Touch is the ultimate example of style over substance, and don't let anyone tell you otherwise.