There is a 6mm x 6mm x 3mm space between the Broadcom chip and the wireless antenna. There isn’t enough depth for an iPhone-style autofocus still camera, but just enough room for the camera that Apple used in the 5th generation iPod nano.
If nothing else, this provides a pretty good reason why the new Touches don’t have cameras. Jobs said the Nano’s camera takes only video, not photos, because the quality from the ultra-thin camera is too poor for photos.
There are a number of practical problems, for both software and user expectations, if an iPhone OS device can take videos but not photos. I can’t imagine that Apple would have intentionally put a video-only camera in the Touch.
Maybe we need to read a bit more into the rumors that there was a “component issue” with the camera sensors for the Touch that got them cancelled at the last minute. This sounds like a last-minute Jobs rejection.
Maybe it went down something like this: Both the Nano and Touch were designed with the ultra-thin image sensor for photos and video, since nothing thicker would fit in their cases. Jobs saw the poor quality of the photos from the sensor and made the team remove it from the Touch altogether, saving it in the Nano but removing the photo capability because the Nano can more justifiably be marketed as a video-only shooter.