i have an Iphone 3GS and it is a wondeful bit of kit, the apps for it are endless, and it doesn't really matter what you want the phone for.
it matches up to what you need/want the phone for and more.
you do have to pay outright for the phone and i have the 16gig, but wish i had got the 32gig which is 180 outright.
but at the end of the day your just paying for your ipod ontop.
which however you look at it is far cheaper than an ipod touch!
so in my eyes you get the best of both worlds and plus apple built it so at least the software is stable.
unlike windows!