According to reports by the Wall Street Journal, Apple is working on a scaled-down version of their widely popular iPhone. The device, codenamed “N97”, would be about half the size of it’s predecessors. It is also rumored that it would be sold along side the iPhone 4, not a fifth generation device.

In order to scale down the size, almost all internal memory would be stripped from the phone. In lieu of storing info on the phone physically, device storage would be located in a cloud-based “locker.”

With scaled down internal memory would also come a dramatic price cut. The new phone, or “iPhone Nano” (not the official title) would be about half the price of the full scale iPhone. Memory is by far the most expensive component in the idevice, making up about a quarter of device costs, according to market research firm iSuppli.

Since the new device would rely heavily on streaming, it helps corroborate rumors of Apple’s MobileMe service getting a revamp and price cut. It also strengthens speculation that Apple will release a streaming music service as well.

It is speculated that the “iPhone Nano” would contain next to no internal storage. The phone’s memory would only be enough to buffer streaming media. This leaves the question of how the device will allow the downloading of apps. Would Apple go the route of removable media? That would be a first time for iDevices.

By producing a mass-market, price-friendly device, Apple would be better able to compete in the ever expanding smartphone market. If Apple is making a device for the cost-conscious, it will allow them to cut into the market shares of lower-priced smartphones by makers like HTC and Motorola.

For those interested, a Chinese company has made scaled-down iPhone knock offs (pictured above). A quick Google search should put you in the right direction for these miniature phonies.