This thread's a bit old, but i'll add my 2 cents anyway. If you buy a PSP slim ($170), a bigger replacement battery ($40), and an 8gb memory stick ($65), you'll have an 8gb video player with 10+ hours of battery life (why you would need more, IDK) that also plays a ton of great games for $275. I challenge you to name a device that comes close to that level of functionality for close to the same price.
Personal Favorite Games:
1.) Patapon
2.) Loco Roco
3.) Syphon Filter
4.) Wipe Out
5.) Metal Gear Solid: Portable Ops
6.) Beats ($5 music game that uses the songs on your memory stick)
Edit: I just checked out the specs for the Ipod Touch and for $299 you get 8gb memory but only 5 hours of battery life when playing movies. The only advantage is the size and better music battery life (22hours). The PSP is a steal if you're a gamer and usually travel with a back pack and can just keep your system in the bag instead of in your pocket.
My Top 5:
Shadow of the Colossus, Metal Gear Solid 3, Shenmue, Skies of Arcadia, Chrono Trigger
My 2 nex-gen systems: PS3 
and Wii 
Prediction Aug '08: We see the PSP2 released fall '09. Graphically, it's basically the same as the current system. UMD drive ditched and replaced by 4-8gb on board flash memory. Other upgrades: 2nd analog nub, touchscreen, blutooth, motion sensor. Design: Flip-style or slider. Size: Think Iphone. Cost: $199. Will be profitable on day 1.
