I'll catch some hell for saying it, but Apple's fifth-generation iPod (aka the iPod Video) is one of the best hard-drive MP3 players of all time.
Say what you will about sound quality or the easily scratched screen, compared with today's iPod models the 5G iPod has a lot of advantages: it's compatible with just about every iPod accessory ever made; video output is built right in; you can use it with older computers and old versions of iTunes; and there are countless ways to hack and modify it. Unfortunately, the old guy just doesn't offer enough storage.
Don't throw out that old 5G just yet. Rapid Repair now offers a 240GB replacement hard drive specifically made for the 5G iPod (iPod Classic and Zune users will have to look elsewhere). Granted, the drive will set you back $294, but it could be worthwhile if you just can't live without your entire music collection in your pocket or you insist on listening to large lossless audio files.
I could also see the justification for upgrading if you've already invested in a lot of iPod accessories (speakers, car stereos, video docks) that won't work with new iPod models due to differences in voltage or video output. Spending $300 to upgrade an MP3 player you love makes much more sense than spending the same money to upgrade all your perfectly good iPod accessories.