First off
Apple did nothing to update the iPod touch last Fall when it was already one generation of processor behind. Now come fall, if it is not updated, it will be three behind. This means they're catching it up to an A7, being really awesome and giving it an A8 alongside the iPhone and iPads, they're going to be stupid and give it an A6, or:
They're just going to kill it entirely. Let's think about this for a second, iPhones are now on all four major US carriers, and the list of supported carriers world-wide grows each year. Most children are being given smartphones now where they weren't in years past, and few of the iPhone's massive customer base are buying the iPhone out of contract (and that's relative to the customer base as a whole). There's little reason for Apple to keep the iPod touch around as the iPhone does everything it does, but with (soon-to-be) three-generation's newer hardware.
Trust me, I am a devout fan of the iPod touch; capacity aside, it is their best iPod ever, and I'm not at all happy about doomsaying its future. But the iPod line is selling less and less overall, and at some point, it'll make sense for them to consolidate into a single iPod (call it the seventh generation iPod [where the iPod with video was fifth and the iPod classic was sixth] if you want) that has touch screen controls, 128-256GB of flash storage, at least a 3.5" touch screen, maybe enough connectivity (wifi) to allow iTunes Radio and call it a day until that model dies out however many years thereafter.
It sort of doesn't make sense to have an iPhone-minus-the-phone that is THAT crippled and THAT stripped down relative to current hardware, especially with iPod sales figures being what they are today.