The iPhone is by no means perfect, but it's better integrated and more functional than any smart-phone I've had.
AND..., the really nice thing about both the iPod Touch and the iPhone is that any improvements and upgrades to the device (either one) is a simple "software upgrade". With that, they give you new functionality that you didn't have before and new features that weren't there.
All the other phones that I've had were "locked into a feature set" that came with it when I bought it and nothing past that, no matter how long I had it.
But, with the iPhone (which is what I have) and the iPod Touch, I've seen upgrade after upgrade and added functionality and more, ever single time there was an upgrade. And it was simple, just clicking the software download -- and you got a "new phone" (or a new iPod Touch... :-) ...).
Yes, this is really important. The iPhone firmware continues to evolve. You might not get a feature that requires the latest hardware (i.e. video or the compass in the 3GS), but you aren't stuck with buggy firmware.
I'll probably buy the next generation iPhone (after the 3GS), since my 2-year contract will be up for renewal. AT&T offered me an upgrade to the 3GS (at the contract renewal price), but I decided to wait another year -- the features in the 3GS weren't enough for me to make the new commitment.
I'm really happy to see the Android and Palm Pre hit the market. I'm not going to get into a fanboi shouting match about which is the best, because I think every one of them has strengths and weaknesses. But, each will push the others to continuously improve, and everyone wins.