Well well, nice review inspector_g. To answer your question in the last line, the smaller capacity of the Touch compared to the iPod 'Classic' is down to the technology. The Touch/iPhone use FLASH memory in contrast to the others using hard drives.
I felt that to make a proper comparison between WM devices and iPhones I had to buy one. There is only really one reason why I won't keep the iPhone - No activesync client or push mail. I am sure that Exchange Push Mail will come in time with firmware upgrades for the iPhone but for the moment I can't keep mine.
However, the operation of the device is so slick and functional that I've been tempted to keep it, if only for the media capabilities. And while these are truly well implemented they are lacking in format support. No WMV, WMA or Divx files will play on the Touch/iPhone. This is a shame.
Other things like 3G, while important for some, it's definately not for the masses. I can do without it. I did like video calling to say good night to the kids when I was using the Hermes. But that's the only time I used 3G.
In terms of positioning, I think the Touch will do well, but not against the iPhone. Didn't Steve Jobs himself say that the iPhone was the best iPod experience? The US Pricing makes purchasing the iPhone only a hundred dollars more expensive. Ok, it's half the capacity but that's what syncing is for.
For info, my iPhone came by the way of Ebay. I unlocked it myself and activated youtube. I would recommend it over any current WM device but only to people without the requirements of divx, wmv, wma playback and exchange push mail.
This is said, not to be argumentative, but in taking an unbiased approach to the use of the devices. I don't particularly care for using the iPhones keyboard, but its clearly easier than the built in WM soft keyboards.
Don't fret though, I'm still using the Cavalier! Best one ever for me
Cheerio
Howard