Well I'd disagree and say that iPods are the best portable music players around. Not everyone buys them just because 'they look cool'.
The standard iPods still play music, but also play videos, and you can add photos onto them too.
But the touch is a different kettle of fish. It has a touch screen, and is more like a laptop than an mp3 player. It's basically an iPhone without the phone features. It connects via wifi, and has a web browser, email, games, calendar, address book, large screen for videos, etc.
The 2nd gen iPod touch also has a speaker to listen to music without headphones, and can use a microphone on headsets.