Look at your entire CD collection... for some people it's immense. Now, imagine some of the largest collections you've ever seen, and then picture all of that fitting into a palm-sized device. You can take all of your music with you anywhere you go. Get a FM broadcast piece for $30 and you can even listen to it in your car. Look at the iPod as the next step in the evolution of portable music.
Portable Radio --> Walkman --> Discman --> iPod (MP3 player)
The iPod gives you excellent sound quality, lots of storage space, and a sexy package. Face it, iPods look better than any other portable out there, they just look GOOD.
And, if you travel a lot, now you can watch videos (TV shows, movies etc) on it.
I have a 40GB previous generation iPod (no color screen) and I love it. It has my entire music collection on it and I take it everywhere with me. Very useful when I'm sitting in a server lab testing equipment and need some music to fill the silence. Plus, the iPod is essentially a hard drive, so I've used it as a portable backup device in the past too.