Don't think of the iPhone as a phone. It's more of a portable computer than anything else at this point. They happen to be able to make cell calls as well, but it's almost secondary to their basic potential.
At this point, iPhones are able to access wireless LAN's and move files around to other computers on the network, as well as full web browsing, Email and PDF document capability. Access to 3G networks also gives them very high internet access speeds even when away from a wireless LAN.
The touch screen and underlying software to drive it is one of the key attractions for me. While other manufacturers have finally figured out that touch-screen technology is the obvious direction for the future, they haven't yet duplicated the ease of use of the MAC interface currently available on the iPods and iPhones.
Buttons are a bad thing. Moving parts are a bad thing. Touch screens and solid state storage are the way everything will eventually go.
The only major drawback to these devices are the visual size, and the need for physical "KEYS" in order to touch-type rapidly. But both of those drawbacks are being addressed with LEP flexi-screens and voice recognition for dictation (instead of typing).
I just wish they would hurry up and get to the point where Phone, PDA's, Cameras and Music Players were ALL combined into a single device. At present, you still have to get cameras separately in order to get decent pictures. But that won't last long.
Also, the LEP (Light Emitting Polymer) flexi-screens are still a few years away, and those will eventually allow larger displays which can be rolled up into pen-sized tubes when not in use, substantially improving the viewing and typing surfaces when unfurled.