Yeah, I think that's their biggest problem. They still can't build enough to meet demand which also means they are keeping production capacity away from competitors which is also driving prices up for them.
One thing I'm curious about is why no one has come out with an Android based competitor to the iPod Touch. At least there they have a huge selection of apps ready to go waiting in the market, especially games, that don't require the phone bits of that form factor.
Apple probably sells 60 million iPod Touches, is no one in the Android hardware space interested in a piece of that market?