Apple making a shrunken iPhone? That would be tricky

Is Apple really planning to make a smaller version of the iPhone, like the Nano version of the iPod?

Is there a way to take away features from the iPhone and still make a product people want to buy?
Word is that Apple has already or is currently considering this question. Rumors are swirling that a smaller and cheaper version of the iPhone to go on sale later this year.
Should we believe these reports? Probably. The big mobile tech event Mobile World Congress just kicked off in Barcelona. Apple's not there, but the company does make a habit of trying to steal the thunder from big trade shows, like it did when it sent invitations to reporters during the Consumer Electronics Show that everyone assumed rightly was the announcement of the long-awaited Verizon iPhone. Like CES, the MWC is big on Android and Windows announcements, so it makes sense for Apple to want to make a little noise. Of course, the leaked reports could just be a trial balloon to gauge consumer reaction, but Apple isn't exactly known for taking a poll before it does something.