The apple page explains it pretty well;
http://www.apple.com/ipodtouch/
And a full list of its features can be seen here;
http://www.apple.com/ipodtouch/features.html
Music, Videos/Movies, Wifi, Wireless iTunes Store, Wireless App Store (with hundreds of applications), Mobile web with Safari, E-Mail, Google Maps, You Tube, Photos, Calendar, Contacts, Stocks, Weather, Notes, and a Calculator.
Its basically an iPhone, minus the Phone capabilities, GPS, bluetooth, Camera, & EDGE/3G.
While nothing it does it revolutionary in its own right (though many of us will argue the mobile web is by far the best around), very few other devices do so as effortlessly, intuitively and with such a slick design as the iPod touch & iPhone. They really are a joy to use, rather than a hassle like most others.
Some interesting upcoming apps include;
Simplify Media (for streaming your entire iTunes library to the iPod Touch/iPhone over Wifi)
Slingplayer (watch and control your Slingbox - Live TV, DVR, etc)
Skype (though for iPod Touch - you would need a third party mic as none is built in)