The internet flared up after an analyst predicted Apple coming out with a simpler version of the iPhone, which he referred to as the iPhone nano. While such a device that builds on the iPod nano by adding simple phone capabilities is definitely possible, it is also unlikely in the near future.

It didn't take long after one of its Taiwan analysts started talking about the iPhone nano for JP Morgan's American headquarters to release a report distancing itself from such predictions.
Everyone seems to be in agreement that for the long term success of the iPhone, Apple needs to release several models, as it did with the iPod, to cover more of the market. However, the timing of such devices is quite debatable. Apple has no need to come out with such a device by the end of the year. The iPhone will still be a hot new piece of technology then and it is highly unlikely that anyone will have a device that can compete with it. Furthermore, Apple can easily increase the desirability and value of the existing device though software updates.

It is obvious that new iPhones will follow, just like the mini and Shuffle did for the iPod. But there is simply no reason for Apple to do this until the current models have outlived its lifetime. Releasing new models by the end of the year would be flat out stupid. The First iPhone would still have to reach certain market, like Japan by that time. A new version would only send out the message that the first one was dated, hurting sales.

An iPhone nano is not a matter of if, but a matter of when, just like the first iPhone was. However, one patent application does not make a product and Apple has a long history of patents that never end up seeing the light of day as products, or only coming out years later. The iPhone still has too much traction for Apple to bring out another device just yet.