An iPod Touch is more of a PDA than a PMP. Its strength is in running apps. The Audio and Video quality is mediocre from what I have seen of of it. If you want an all-in-one device which can be used for web browsing and running apps/games with passable audio/video quality then iPod Touch sure is your choice. However if your emphasis is on video and audio, iPod Touch is not a good choice. Its a lousy video player with the non-standard screen resolution which results in loss of screen area while playing wide screen content and added to that, the screen itself is a meager 3.5" which may be too big on a phone, but too small for a PMP tailored for video.
If your emphasis is mainly on audio playback and you want a compact player, then COWON D2 should be your choice.
If you want a PMP that's to be used mainly for video, then don't consider any device with anything less than a 4" screen. COWON O2, Archos 5 are good choices here. If you are Ok with it, then even brands like nationite offer good video capabilities at a bargain price. Proper video oriented PMP's mentioned here also allow you to just dump your dvd rips on the player and play them without having have to specially transcode them for the player.
If you want a device which is good for video and games and does not cost too much, then PSP is your choice. It has a decent 4.3" 16:9 display for video playback and games, but do note that its a lousy audio player.