Seems pretty easy to say this should sound more like the 5.5g iPod. I actually believe this will be iModded (What else is Vinnie planning to do to appease his tweak instinct?). So if you don't like the sound quality of the old iPod and don't plan on shelling out some more dough for a mod possibly in the future, don't buy. There are plenty of devices that can do almost everything the touch can. Plenty of smart phones have the same or more capability.
The Sony PSP also has wifi, internet browser, supports any format music with codecs, movies, and does much more like games, many emulators, streaming shoutcast radio, tv out, Universal Remote via iR (old style only natively), Remote administration via VNC, and much more due to homebrew. It only misses touchscreen support, but at least you can use a real keyboard via infrared. I would personally buy this and a few 4gb sticks for the same price.
The PSP only goes up to 8gbs on one stick though, but at least its battery and memory are replaceable. The sound quality is not the best, but I would put it barely lower then the old 5.5g iPod myself.