I don't see why some people are talking about how it'd be good for Apple to phase out the iPod touch in favor of low-end iPhones.
Not everyone wants a smartphone. And iPad proves not everyone wants a cellular radio in everything.
I know plenty of actual adults, young and old, who have an iPod touch and a regular "dumb phone". They want the iOS device but don't want a "phone" anywhere near it. Especially considering how cheap and good prepaid services can be these days. If I didn't have an iPhone (I love my iPhone 4 but I kick myself every day for renewing my contract with AT&T a year ago to buy it), I'd have no problem carrying a regular "dumb" phone and iPod touch. Before the original iPhone I had no problem carrying an iPod mini and dumb phone. Then 80GB iPod 5.5G and dumb phone.
With iPod touch sales increasing and becoming the most popular iPod, theres no reason for them to phase it out.
All they need to do is continue to improve it. Get rid of the stainless steel back. For the love of all things good, PLEASE get rid of the stainless steel back.
Put better cameras on it. Read something some time ago about a 3.2MP camera sensor that was available that would fit in the iPod touch form factor. Use that.
Bump it up to A5 with 512MB of RAM. Thats all.
Theres always going to be a market for the iPod touch and sales prove it. You don't sell tens of millions of something if theres no market for it.
The same way theres always going to be a market for something like the iPod nano. Even though sales of it might be going down, the market for it will always be there in one way or another.