Among the rumors circulating in the run up to Apple's developer conference in June, there are rumors that the iPod Touch will get a camera at some point in the near future (September). Even if Apple foolishly stays with AT&T exclusively in the US for iPhone distribution, I suspect a "back door" to expanded distribution will be in making the Touch and the iPhone barely distinguishable over time. 

There are roughly 17 million (or so) iPhones that have been sold on a global basis. But when the iPod Touch, which runs almost all the iPhone apps, is added in the number jumps to over 37 million. While some people see the iPod Touch as an iPod with apps, others (including me) see it as a stripped down iPhone without AT&T. You can buy an iPhone and use it exclusively as a WiFi device today but it costs hundreds more than buying the subsidized iPhone with an AT&T contract. 

The two principal user experience differences between the iPhone and the iPod Touch are: no camera and no mic (as well as no phone service) available to the latter. However, with an available mic-enabled headset or earphones, the Touch can become a phone via Skype, Fring or Truefone -- today. That assumes a WiFi connection of course. 

Though an embedded mic is not part of the rumors I suspect that will eventually come to the Touch as well. That would enable the device to function more natively like a phone and to take advantage of voice search apps that currently don't work on the Touch. 

As always these are rumors and we've got to wait to see what happens. However, I suspect the devices will almost converge in terms of their functionality over time, athough Apple will keep the products distinct in some ways to perserve a separate identity in the market.