Generally speaking, this is a bad idea.
1) it's a step backwards in technology. an unnecessary one, at that.
2) Flash prices are fated to drop, and capacity is fated to increase. That is how technology works, and it's basically a matter of time before the two coincide to create the amount of space desirable in the iPod Touch (for me, it's anything over 64GB)
3) Flash-based storage is much faster than hdd; the OS, the apps, everything would run slower
4) Flash-based storage is much more battery efficient. Seeking for info on hdds not only takes more time, but more energy. Battery life would decrease.
5) The design of the iPod Touch would have to be completely redone... to be considerably thicker. It's not as though the iPod Classic on its own is a really chubby baby, but compared to the Touch, it's clearly noticeable.