Rumor: Apple Producing Smaller iPhone Handset
What's really crazy is just how much sense a move like this suddenly makes. Just this week, HP introduced their smallest webOS device ever, indicating that there's some demand for a smaller phone like that. With Apple already producing an iOS-like interface on the iPod nano, it wouldn't take too much effort to port that over to a smaller iPhone. Reportedly, Apple would sell the phone for $200 without a 2-year agreement.
In America, we're used to hearing about cellphone prices in terms of 2-year contracts. For example, a non-contract iPhone 4 would cost well over $600, so a 3x decrease in price would be monumental. These rumors definitely aren't confirmed yet, but it's hard to believe someone would fabricate something this elaborate. Not to mention that it makes sense; HP already has done something like this, so Apple might not be too far behind.
It's hard to say how limited a small iPhone would be. Would the iOS experience suffer? Only time will tell...if it ever happens, that is.