FlickKey, a note-taking app for the iPhone, has the world's smallest virtual keyboard on the iPhone. The keyboard is no bigger than an inch in either direction and predictably, completely nutty to type on.
The way the keyboard works is that there's nine letters on each mini-tile, and tapping or swiping the tile in a certain direction gives you a different letter. For example, a upward swipe on the left tile brings W, an upward diagonal right swipe brings S and a simple tap on that same tile creates E. It makes some sense but I'm confused at the layout of the letters - I'm sure I use the letter 'S' much more than 'Y' but it's the same motion on a different tile. I think it could be more efficiently laid out.
The bigger promise for the app is more to show that a keyboard smaller than your pinky finger is possible. And granted this keyboard would make typing on a wristwatch-type device possible (hello iPod nano!) but keep this away from my iPhone. Try out the app to see how it works. [iTunes via Wired]