It's not for still images, it's for HD video... Apple is assuming correctly that to take stills is stupid... But video is useful.
As has been shown by all the warm and welcoming reviews both the iPod Touch and Nano got when they were released with ****** cams.
I can't imagine what a 1MP cam would be good for. Shooting videos with such a large device is even more useless than using it for stills or app supported features. Heck even the screen now almost has more pixel than those shots would have.
T.