The iTouch is a nice bit of kit and has all the functionality of the iPhone (minus voice).
It works just like an original iPod, in that you can transfer music & video (MP4) that you already own directly over, using iTunes. Content does NOT have to be purchased via the apple store.
The built in browser works well and is easy to use as is the wireless connectivity.
My advice, pay extra for the updated version, if you can't wait.
Otherwise, wait a while, the price will drop a lot.