I ran into the exact same choice a while back. HD monitor upgrade (from a standard HP flat screen LCD) or a Ipod Touch for my fiance and I. (Eventually I ended up with both)
Im going to assume you already have a monitor and this is a upgrade. Therefore you already have the enjoyment of music from your PC (You just dont have Itunes in high def) but you are missing out on the video aspects of the computer such as high def gaming, video streaming (Hulu is great), and digital images.
Now the Ipod touch is a interesting device. My fiance uses it for music, while I couldn't care less about the music aspect. I use it for apps. The Ipod touch is by far the most responsive device out on the market I personally believe. (I own the droid, just doesnt compare) As well as the most diverse app store compared to Google and Microsoft. 90% of my apps are free that I use all the time, while the other 10% I spent about 99cents on average for all of those. Gaming is fun, although they tend to be casual rather than something you'll want to spend alot of time with.