But what is great about the iPod Touch is that it can load "apps" that can do many things, and this includes photo programs that can be used to modify your photos. Although not exactly like Photoshop (actually there is a simple Adobe Photoshop version available) many of these apps have filters, presets and crop tools that allow you to create pretty interesting images.
In this sense, image quality can be overcome with tricks and gimmicks. All and all, it is kind of fun.