The point of the device would be to hit a lower price point without diluting the iOS experience. They could do that by starting with a 3GS, giving it an A4 chip, and a more attractive form factor. It's not going to be about raw specs but creating an entry level iPhone experience for $200ish. What will differentiate the smaller iPhone from the premium iPhones? Features (Siri), Speed, and Screen (Quality/Size). But in every other way the "Nano" can be an iPhone.