Why they hell haven't Apple woken up and exploited the ease of handling of the iPod Touch as a gaming device? it just needs a bigger screen version! Put a 5.5" ipod next to a PSP. Huge difference in size/pocketability. And battery life. Do the lack of physical controls make much difference to casual gamers? Probably not for most. The PSP can't do half of the useful things the iPod can: read books, view magazines, write notes, keep contacts etc.
a 4" ipod is too small - except for little kids. We have friends who use old 4" iPhones for their kid's entertainment. If they break, they break. Let's face it, after two years most phones are disposable (or treated that way).