The iPod functionality is realy good and the integration with the phone is also fantastic.
I'd say the volume button on the side of the phone that works when it's locked are a great improvement as is the ability to see all the chapters in a enhanced podcast. There are many more, you might want to read the Engadget iPhone review and just skip to the iPod section. www.engadget.com/2007/07/03/iphone-review/
The only thing I haven't figured out is how to view the notes from a podcast.
Ben How good could it be if it isn't HD? Engadget HD