http://www.appleinsider.com/articles/09/09/10/ipod_touch_with_camera_remains_in_apples_pipeline.html
Appleinsider reported a few days ago that "sources" say Apple would still like to introduce the camera as soon as possible. That goes along nicely with technical problems being the culprit for the cut seeing the photo evidence shows that the 3rd gen iPod Touch was designed with the camera in mind. Certainly, besides the space for a camera, iPod Touch getting iPhone OS 3.1.1 while iPhones got vanilla iPhone OS 3.1 seem to indicate that some last minute revisions were needed just for the iPod Touch. Perhaps the close proximity of the camera/mic and the WiFi/Bluetooth chip caused interference which could be resolved with shielding or different camera/mic choice?
Steve Jobs' explanation of the Touch needing to be cheap could just be a smokescreen and delaying tactic. The cost of the Nano's camera is only going to be in the single digit dollar cost (the iPhone 3G S's autofocus camera costs $9.95 according to iSuppli) so it's highly doubtful that adding a camera would make the Touch unprofitable at the $299 and $399 price points. The reduced profit margins would probably be made up by the additional sales having the camera will bring. Similarly, if Apple was really wanting to drive iPod Touch sales by low prices, the 8GB 2nd gen iPod Touch could be sold cheaper than $199. Afterall, it maintained a $30 price delta with the 8GB iPhone 3G subsidized price when the iPhone 3G was $199, yet the delta has expanded to $100.
I think it's likely that the camera will be introduced in a mid-life January refresh of the 3rd gen iPod Touch. I can't see them doing it before the holidays since it would be disruptive to the supply channel at a critical time. But a post-Christmas introduction is definitely possible and would be similar to what was done to the 17" MacBook Pro which was updated but kept non-Unibody when the rest of the Unibodies were released last October, before being replaced with a 17" Unibody just 3 months later in January 2009. If the iTablet is released early next year as predicted, then it'd make sense to give the iPod Touch a mini-refresh whether in features or pricing, perhaps a silent one, at the same time to better realign the product lineup. I'm thinking the camera will be introduced for free for the 32GB and 64GB's $299 and $399 price points and a camera equipped 3rd gen iPod Touch with 16GB of memory will be introduced at $249 if the 8GB 2nd gen model is kept at $199 or the 8GB Touch could be discontinued and the 16GB 3rd gen Touch could debut at the regular $229 price to better compete with the Zune and perhaps a 32GB iPod Nano will be introduced at $199.
Even if it uses the same camera hardware, I'm hoping to differentiate the iPod Touch's camera from the Nano's, the Touch could get photo capability which can probably be helped with software enhancement using the Touch's better processor. The Touch could probably leverage the motion compensation algorithms developed for iMovie.
I'm guessing that the 3rd gen iPod Touch didn't get a digital compass or the oleophobic screen coating? These would both be sensible additions where the coating goes to the quality perception of Apple products, while the digital compass could use wider adoption as a complementary control method with the accelerometer. Beyond the obvious compass direction applications, I would think more advanced algorithms could use the digital compass data to assist the accelerometer is detecting and refining how the device position is changing leading to more accurate controls in things like games (supposedly the Touch's selling point), which can only be a good thing.
Seeing all the rumours before of the iPhone getting dual cameras, namely a new camera on the screen side for video chat, I think it's likely that this feature will be coming in the fourth gen iPhone and will be using the iPod Nano's camera. There is no need for the thicker or higher quality 3MP autofocus camera since the Nano's camera seems decent enough for video chat and the thinner size will allow integration without taking up too much space. The faster processor on the iPhone could also be used for motion compensation and other enhancements to improve the image.