^^ It looks like it would be uncomfortable to hold.
My prediction:
Take the iPhone 3G, slim it down to a little bigger then the iPod Touch 2G size. Add 3.2 Mega Pixel Camera, faster processor, and a bigger capacity battery. Bump up the storage space, eliminate 8GB model. 16GB and 32GB are the new options, priced at 199+299$, respectively.
3.0 Software = MMS etc etc, video camera is enabled so you CAN take video recordings.
iPhone 3G and iPhone get updated to 3.0, yet cannot do video recording out of the box, however can be enabled through jailbreaking with the aid of the Dev Team. iPhone original can have MMS enabled through jailbreaking and devteam, etc, however it takes some effort with calling ATT to get it working completely.