It seems to me that this thing is going to rock.
In terms of ease of use, it shouldn't be very hard to have two entirely different interfaces. One the pretty standard iPod interface, so except for maybe an extra button or two on the front, it looks and behaves just like an iPod Nano.
Slide out the number pad (more realistic and probably over all more "Appleish" than a full Querty keyboard, as it's so much simpler) and the iPhone switches to its phone interface. If you call someone, or receive a call, music automatically pauses.
In terms of the battery, I think the two battery version is an excellent idea. The phone part should have access to both batteries, so even if both batteries are drained, there would still be enough residual power to send and receive texts at least. The music bit would run off just one of the batteries.
I think they should stick two identical batteries together back to back, so they can be ejected. Two batteries capable of playing music for about 12 hours each. So, you can buy a new battery as a backup, or as a replacement. Also, if you run out of power for the music player, pull the battry out, turn it round, and shove it back in. Twelve more hours of music, and the other battery gets a chance to rest, build up some residual charge, maybe enough for a call or two, should you run down the other.
This is going to be awesome, and would be an awesome replacement of my crappy $10 motorola

. Especially as I don't have an iPod, but would very much like one. My money is waiting, Stevie J.
PS. Don't care about camera. Any half decent camera is going to be far better than anything that could be put on an iPhone. Can't you get cords to transfer photos directly from camera to iPod anyway? I very much doubt a camera will find its way into the iPhone for quite a while yet, and if it does, I think it might be trying to do too much.
PPS. I think it would be better not to let software run the battery allocation. After all, how do you test how much juice is left in a battery? Slowly decreasing voltage? You don't want a battery to do that. I don't think a software method of controlling when the music stops playing would be nearly accurate enough, especially when you start requesting 10% or lower.