"We believe that iPod Nano will be converted into a phone because it's probably the only way for Apple to launch a lower end phone without severely cannibalizing iPod Nano," he said, noting that the new phone could have "rather limited functionality."
The way it is written in the article suggests that the new nano will also have phone capabilities. IMO this will not be the case. The new nano will have the full face touch screen like the phone but WITH NO PHONE CAPABILITIES. "rather limited functionality" = just ipod.
But we will wait an see.