Will an iPod touch suffice for testing iOS apps?
I wrote an extensive blog post about this topic a while ago: http://wjlafrance.net/?p=188

Basically, an iPod touch is great as long as you don't want to use GPS-based location in your app (you can test general, wifi-based location) and are only interested in iOS 4+ deployment (or iOS 5+ if that's what your iPod is running).