Definitely Jailbreak it. I have an iphone and there are some cool apps in the app store, but when you jailbreak it you really get the goods. Winterboard for themes (necessary and awesome), Emulators -- I currently have Genesis, GBA, and PSX emulators working nicely and a port of the original Quake that is pretty impressive. I remember seeing somewhere that they ported Quake 3 over, too, but I don't remember if it was just in development or what.
As for regular apps, USA Today is pretty great for checking up on current events. Google Earth is Google Earth; pretty fucking cool. Pandora and AOL Radio apps are absolutely necessary, because I'm sure you know how awesome Pandora is and AOL Radio just has a great selection of satellite radio stations that are all free.
Space Deadbeef is a pretty badass r-type-style shooter, and Cube Runner is pretty addicting. Tap Tap Revenge is fuckin awesome -- think guitar hero knock-off that is just barely different enough to stay fresh. Done Drinkin is a simple but hilarious game for you and your buddies at a lame bar.
All that shit is either free, or some sort of freeware trial version of paid software. I'm thinking of buying Tap Tap, it seems totally worth it. I suggest getting the AppVee program. It's basically a database of video reviews for iphone/ipod touch games and apps. Gives you a much better idea of what to expect than the shitty blurbs they post on the purchase page. Check out Hero of Sparta -- it looks like a ridiculously badass mobile God of War. I've been meaning to try it, and I might consider if they drop the price from 10 bucks to something a little more wallet efficient.