I was really considering buying the iTouch until I realized that we could only rent movies and not buy it unless we bought the DVD with the iTunes compatibility. My friend said that we used to be able to buy movies, but then they changed it. Can we download movies onto it? Like can I "buy a download" off of Amazon.com for a movie and transfer it into iTunes or would it not work?

I do not know, but if the Amazon one does not have DRM and uses M4V, MP4, or MOV that the ipod can play then yes it should be able to play it. Im pretty sure there is still the buy videos option, the rental store is only a new feature now. Unless im wrong anyone feel free to correct me.

I suppose the best route is the slow time consuming route of dvd > computer > convert for Ipod

ooh itouch .. my friend has one and I envy her -__-
actually, you could just dl the videos into your itouch for free
just convert it into mp4 format, that's just how my friend does it :]

you can still buy movies through itunes, they just added a featuer where you can now rent, but you can still buy it now if you choose to.