I know many of us cannot see a smaller iphone with a smaller screen, ESPECIALLY for typing. But wouldn't a slide out keyboard make more sense? I know Jobs hates buttons but if this device is not going to have a 3G data plan, ( Which is a big selling point for purchasing ) wouldn't a keyboard kind of solve the issue of having a smaller screen, and be a key feature to convince people it buy it? Plus if this is targeted towards teens or people who text alot I think it would sell well. I would even buy one as a back up for my 3G 
things that you think are issues but really are not:
Different screen size CAN handle the same apps such as games
Online apps would have a message before buying that the app saying it will work on wifi only.
Landscape sms full screen will display only the conversation , at the near bottom of the screen it would have a send button and a shift key which would bring out a row of different characters such as @&!(#*+= that you could slide through to select.
450 min Unlimited text = $60 a month not bad for a teen or even a person who wants something between an iphone and a touch
I think this way an iphone nano would be plausible , what do you think?
things that you think are issues but really are not:
Different screen size CAN handle the same apps such as games
Online apps would have a message before buying that the app saying it will work on wifi only.
Landscape sms full screen will display only the conversation , at the near bottom of the screen it would have a send button and a shift key which would bring out a row of different characters such as @&!(#*+= that you could slide through to select.
450 min Unlimited text = $60 a month not bad for a teen or even a person who wants something between an iphone and a touch
I think this way an iphone nano would be plausible , what do you think?