The sound quality of the iTouch is limited by the hardware, not the software. Although sold as a media-player type device, the audio-quality is actually rather poor for a product in its price range because it is really positioned more as a multi-functional device in which music-playing is just one of many supported features, and the audio-output circuitry is less important than its other features.
The iPod touch is essentially something which looks nice and has a wide range of apps (some useful, some rubbish, some free, some expensive) which serve every purpose you could imagine. It is a great device to choose for someone who wants apps that can perform pretty much anything, plus a wide range of games (there are quite literally tens of thousands of games apps).