Apple receive no money from contracts, the revenue sharing model ended with the release of the iPhone 3G.
They keep the iPod touch reasonably close to the iPhone in capability to drive up sales of the much cheaper device. 32GB iPod touch is $549 whilst the 32GB iPhone 3GS is $1040.
People who don't want to spend as much money and people who don't want to buy into a 2 year contract will snap up the iPod touch knowing that it can do pretty much the same stuff as the iPhone.
I'm certain that the majority of the 40 million+ iPhone OS 3.0 devices Apple have sold have been iPod touches because they are significantly cheaper than an iPhone and have no requirement for ANY ongoing fees.
It's a fantastic idea to throw a camera into the iPod touch, it opens up camera apps to many more users, introduces a new revenue stream and provides a whole new world of content.