@ash ......
Before beginning let me tell you (and other as well for that matter) that I own Both PSP, iPod touch and iPod classic 30GB, infact I own an iPhone as well so the following experience is my very personal own ....
SONY PSP
If you ask me both are totally different gadgets and excel in their respective department .......... Sony PSP is a pure gaming device and simple excels in that, ipod touch or any other media device not even comes close to it .... There are loads and loads of gaming titles available for PSP. Graphics are at par with PS2 and ofcourse since its primarily a gaming device, its gaming controls matches PS2 which makes it easy to use. You can spend hours and hours with PSP with your choice of games (and ofcourse if at all you are interested in Gaming).
The other thing that PSP excels is movie viewing, the 4.3" 480x272 16:9 ratio screen is simply gorgeous while watching HD content converted to PSP format. If for any reason you do not want to pull out you notebook while travelling, you can enjoy some casual movies/TV shows/Cartoons on PSP and would not be disappointed ......
Same goes with photos, which look stunning, and you can view snaps while listening music as well (unlike Touch)
If you plan to Hack your PSP (much like Jailbreaking iPod or iPhone), you can use your PSP in a much more versatile way .... for example .. being able to play retro games like Mario/Tank/Jungle/Contra/TMNT ...etc.... practically all Nintendo and GBA games ...... you can customize you PSP in all possible ways (much like what Jailbreaking does for iDevice) and lots of other stuff ....
Apart from this there is nothing else PSP excels ./........ Through you can listen to Music, but thats just OK, even with good pair of earphones ......
Browsing is an absolute pain on PSP, navigation is not optimized for PSP screen and its slow. Configuring Wifi is a Pain as well. In a nut shall PSP is not for Browsing ...simple ... I mean yes you can surf net no doubt but if you ask me its not a good/simple experience ...... There are no widgets, no apps no social networking and no G-maps as such
iPod TOUCH
iPod touch is a mix bag, but one thing it excels is Browsing and Social networking. Gaming is a joke on Touch, all you can play are flash type kiddie games. I mean there are graphic games as well, but they look crap and being a touch screen, gameplay is difficult, couple of games do use the accelerometer pretty innovatively, but thats just about it ...... it does not even come close to PSP in gaming ......
Movie watching again is not as good as on PSP, the screen is too small and its not as vibrant as PSP while watching HD content. Snaps look good but unlike PSP you cannot listen to music and view snaps at the same time (no multitasking)
Coming to Music, thats where it excels along with internet ...... far better than PSP, especially with a better earphones ..... but I would also like to bring this that though iTouch is good in music when compared to PSP, BUT not when compared to iPod nano, OR iPod Classic or Shuffle. There is a difference in the Hardware of Touch and Nano/Classic or Shuffle ....... Nano/Classic or shuffle sounds better than touch, be aware of that .....
So if Music is your ONLY prime concern touch is not for you.
Coming to the part where touch excels ..... and that is Browsing, Social Networking and as your personal daily manager.
Browsing is heaven on touch/iphone, even with a small screen. Pinch and zoom works flawlessly making reading text absolute ease ...... double tap intelligently fits the page according to the landscape or portrait mode .... typing is pleasure. The only drawback is you cannot multi task so you cannot listen to music or chat while browsing ..... OS4 solves this but I am not sure if that works on itouch as it does not work on my 3G (only 3GS).
Apart from it Social networking again is seamless ..... with gazillion apps and widgets available for some or the other purpose, you will not find the dearth of finding the best one for you.
Personal daily manager ::: Again with loads of apps available touch can act as your office assistance, with full exchange support, gmail support with push notification. Calender sync so that appointments are intact ....... RSS feed for you daily news......MS office support....... maintaining notes, schedules, making travel arrangements, creating your itinerary, recording memos, geo-tagging images, navigation using Google map (with iPhone we have the ultimate GPS) all this is an ease with idevice ........
So the choice is up to you .... what is your preference ......
1. GAMING (can not compromise) PSP
2. INTERNET & Social networking (can not compromise) iTouch
3. MUSIC (cannot compromise) Nano/Classic/Shuffle
I'd say if you can compromise on gaming and can settle for casual gaming as well ... go for iTouch as Music is not that bad on Touch plus you also get pure browsing pleasure ......
Hope I was of Some help ...
Regards
Sammy