I agree the Touch HD does look amazing, but i can see why they decided on the G1 design.
I guess they want the UI of Android to be the focal point, opting for functionality and ease-of-use over design and cosmetics.
The G1 couldn't be more user friendly really, touch screen, trackball and slide-out QWERTY keypad.
I'm sure we'll see plenty of 'higher end' and iphone-like handsets in Android's future, but as a launch handset i think the G1 is a sound choice.
(Plus there's the cost factors too).