I agree that the new nano is fugly. I don't think it needed to play video that badly. In response to those who are asking "why not just get an iPhone", though, I for one don't live in the United States. Even worse, I live in Canada, so if Apple ever does remember to halfheartedly throw an iPhone or two in our general direction, it probably won't be for a few years yet.
In my particular case, I have a sexy little Samsung slider for which I can make my own wallpapers and ringtones, has Bluetooth and even makes calls, which is everything I really want in a phone. I have a 30 GB video iPod, which I use sometimes for music and often for storage. I also have a PSP which I bought 2 games for, played through one and got bored with the other, and now only use as a portable porn machine internet device for when I'm away from my computer. Honestly, for what I'd use it for, an iPod touch would suit me better than the PSP; I've got little enough music to fit on the 16 GB model with room to spare, so I could use the 30 GB iPod solely as a portable hard drive; and since I can sell the PSP, the iTouch won't make nearly the financial dent it otherwise would. I'm sure the circumstances of others differ a lot, but it looks like it's working out nicely for me. Except having to look at that nano. Eww.
Oh, and with the "unofficial" iPhone dev community getting into the swing of things, I have a feeling the iPod touch will gradually start to seem like an especially sexy PDA (that also happens to play media like a champ) as time goes on. That can't hurt.