I own an ipod Touch, and an android phone (G1). I love them both, but I think I have it right as far as functionality - the ipod touch/iphone is a really great multimedia device, but from what I've seen of my friends that own iphones, it's a mediocre phone. The G1 is a great phone and texting/internet device, but it's multimedia capabilities are pretty mediocre.
If you have to choose one (I was lucky as the iPod was a gift and the G1 came for free on my contract), you should ask yourself what your main functionality would be - if you want to just have a single device in your pocket that can do everything, or if you mostly want to use apps and are less concerned about texting/im/phone calls, go for the iPhone. If you want a good phone and don't mind using a seperate device for music/podcasts, go for the Android phone and keep your current mp3 player.