Well back when it came out 3 years ago (which is pretty long for technology), there was really no other touch screen phone like it. Sure there were some touch screen phones, but they didn't recognize touch, so you had to physically push down on the screen so it could register the pressure of your finger. And still even today, most phones still aren't as responsive as the iPhone's touch screen, nor do they have multitouch. It seems trivial now, but the inertial scrolling for instance was pretty much amazing when it was demoed at the keynote. You should watch Steve Jobs's unveiling of it on YouTube, and you can hear the audience in awe when Steve scrolls through lists and maneuvers through the phone; it even seems silly to us now since it's so ubiquitous.
A lot of phones didn't have the "real" web experience either that the iPhone had (smartphones weren't nearly as popular as they are today). It was Apple's first touch-screen iPod; the iPod touch wasn't around yet. And the UI was entirely new. Many features like the following were uncommon at the time: cover-flow, visual voicemail, threaded SMS conversations, relatively good picture quality for a cellphone (people would be so surprised when I'd take out my iPhone to take a photo, and they saw the entire screen open up for the photo), Multitouch for photos and text, Google Maps, YouTube on a mobile device, and even the accelerometer (I remember playing Labyrinth on it for the first time was like magic to me). It was and still is such a sleek device. Just the thought of having the internet in your pocket was amazing. That's why people bought this phone back then.