I believe that Apple is working on a smaller phone, who knows exactly how small it will be. I agree that there are some who don't want/need all the functionality of a full PDA phone. Maybe just something for basic e-mail and music player. Leaving out all the other apps coming in the SDK and the internet based stuff (but who would really want to leave out the beautiful internet interface of the iPhone). But with a much lower price point (read free AT&T) with rebates it could be enticing to many.
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