Oddly enough, I'm in exactly the same situation, and like you, I was horrified at the cost of the current iPods, though despite that, I'm being tempted by the 32 GB iPod Touch... I'm not sure 16 GB is enough for my needs, as I had around 20 GB of music on my old Classic, and still have a fair few CDs that have not been transferred.
But a look at what else is available actually shows that the iPod Nano isn't actually that overpriced compared the rest of the market.
What I do find remarkable is that I can get a new phone (on pay as you go) with an MP3 player, for less than the price of most MP3 players, and as most phones store media on removable SD cards I needn't be limited by what will fit on one card; I've almost decided that may be the best option. Though all those apps on the iPod touch also look alluring (but would possibly endanger my position as an employee..

)
Oh, and almost non-Apple devices are NOT compatible with iTunes.