The mockups people post of the iPhone nano give an indication of how they could do it: Make it a smaller phone, possibly with some fewer features (all of which would be features that are generally optional for developers anyway: EG: the camera which doesn’t exist on the ipod touch could be dropped from the nano).

The screen size would be smaller, but to keep the platform consistent, they could use a screen with higher DPI so that the resolution of this smaller screen is the same.

They could drop WiFi and make all data come over the cell network (also without affecting developers) to save money, etc.

So, I think that if they do release another phone in a smaller formfactor, the platform will be mostly or completely the same for developers, and the price might be lower due to cut features that aren’t necessary for many apps.

I doubt they would release an ipod classic based phone, or a flip-phone formfactor, cause that would split the platform. But an iPhone nano is possible without causing too much pain to developers.

Phone, Calendar, Contacts, Clock, Calculator, Camera, Photos, Settings, and Mail (maybe Safari & Maps if the screen is large enough).

The only cheap touch screen phone for “non-smartphone” users. Makes total sense.