Apple doesn't want to say it loud but it seems that the iPad is the device that comes in between the iPod Touch and the iPhone rather than, in Steve Jobs' own words, one that fits between a smartphone and notebook.
As expected, the iPad turned out to be like an iPod Touch, except that it has a much bigger screen and boosts a number of new features. More significantly though, the iPod Touch is priced very closely to the iPad.
The $399 64GB iPod Touch costing only $100 than the cheapest iPad. As it stands right now, we suspect that there are a (growing) number of people that use either an iPod Touch OR an iPhone but not both because they share so many uses.
The one thing that the iPhone is not good at doing is offering significant usable surface because physically, it just isn't capable of doing so. You simply can't have a phone the size of the iPad, but you can have a media player of this size and this is just what Apple did.
So one can expect that in the forthcoming years, Apple will gradually make the iPad so compelling that it won't make any sense to buy the iPod Touch, given that an iPhone will be much more desirable.
Apple's goal being ultimately to put an iPad and an iPhone in the hands and pockets of new and existing customers. So the iPod family is going to die over the next few years, but it will be superseded by the iPad and the iPhone.
There is only so much that we can hold and our physical features make it difficult to innovate. Now there are reasons to believe that there will be new improvements that Apple will bring over the next few years all targeting not the iPod but the iPhone et al.