First, those looking for the design phallus should check out "Paging Doctor Freud" a few posts down.
Second, a definition: the classic design fallacy concerns appliances. It's when the "artistic" portion of industrial design overwhelms practicality, so that you have a beautiful object that doesn't work properly because of the characteristics that make it beautiful. Olivetti has fallen into this trap a number of times and Bang & Olufsen are often accused of it. I once had a desk with beautiful drawer pulls that were too small for most men's hands, including mine. Looked good, didn't work because of the characteristic that made it look good.
Architects usually avoid the fallacy, but not always. You'll sometimes see handrails that are not easy to grip, for example. My favorite current example is the Gherkin in London, aka 30 St. Mary Axe.
The spiraling mullions are part of the beauty of the design, but they trap dirt. Up close, every intersection of two of those diagonals is marked by a streak of dirt. Oops.
Given the close relationship between engineering and industrial design, it should not be a surprise that "pure" engineering designs sometimes show the fallacy, but it is. Why is it a surprise? Because no one expects engineers to be thinking about aesthetics unless the topic is cars.