Apple Legal: This is a theory, I have not talked to anyone.
Let's go back to the January 8, 2004 David Pogue interview with Steve Jobs. Talking about the possibility of an iPod like device for video, Jobs said: Also recall that, having just released iPod shuffle, Jobs broke with a good deal of bitching about Flash based music players. I guess tech is a bad idea until Apple does it.

Oh, let's also take a good look at iPod photo. Here is a device with all the necessary hardware to drive both standard (4:3) or widescreen (16:9) television displays. Supposedly so I can look at 40GB worth of photos. Right.

So here is my theory: the iPod photo is the iPod video. The iPod photo has plenty of internal video / processor time to decode a number of existing codecs at television resolution, and I'm sure that Apple has some super-wonderful quicktime codec all ready to go (either one that is already available, or one they are working on). Below are a list of things which I believe Apple is currently working on to make this happen:

• iTunes movie support.
• Contract negotiations with the MPAA.
• A firmware update for the iPod photo.

Actually, I think that the firmware update is likely finished, as is the iTunes update. The negotiations are likely the big hold up on iPod video.