I've come across SJT's booth at a couple of shows. He brings along a small N-scale layout, just a loop of track with some scenery. He's got a flatcar-mounted camera on it. It seems to work just fine.
This post ran just a short time ago. I'm not going to waste bandwidth by quoting it (after all, I save my bandwidth wasting for those Haikus) but here's a link:
http://www.trains.com/trccs/forums/1209611/ShowPost.aspx
The camera and battery might be a bit large for N-scale if you've got significant sideways clearance issues, but for most layouts it should run just fine.
It takes an iron man to play with a toy iron horse.
I saw one in action about four years ago. It was installed in a dummy engine (converted Kato loco) which ran in the lead and sent a wireless video feed. I can't remember the details (product and such), but it worked pretty well. Although I thought it was a bit of a waste to sacrifice a nice Kato loco and turn it into a video platform. But you really couldn't tell it was a dummy unit. The camera lens was mounted into one of the light fixtures.