We can assume there's going to be more memory at the existing price points, $299 should get you a 32GB iPod Touch 3rd Gen. Beyond that, let's see...
The first Gen Touch was of course the first and thus a totally novel device. The second was largely a refinement of the first, and not a huge upgrade IMO beyond the memory bump. For awhile no one thought an external speaker would be added for various reasons, but in retrospect it made perfect sense considering the App Store.
Nowadays every cell phone maker and PMP maker is coming out with their own touch screen device and wanting to promote software. I'd like to think Apple would really like to make the 3rd Gen a bigger leap forward than last year. 'Cannibalizing' iPhone sales doesn't matter, it's an Apple sale either way and they add to the App Store userbase. Keeping their platform ahead of other companies though is more important.
I think if they bring in the upgraded processor and memory from the iPhone 3GS and it's still/video camera, that will probably be enough in their eyes. They will spend more time demonstrating great looking games that push the new hardware, I think that is more important than GPS apps.
I would like to see them add at least 1 more major feature- OLED, GPS, something. Because if the camera is the major new feature, it's a bit disappointing since we all have cell phone cameras now. But the upgraded hardware will be a pretty significant boost 6 months down the line IMO.
If GPS really is that cheap to add (someone mentioned $2.25), I could see Apple doing this to further differentiate from the new Zune HD., but just maybe without the new compass.