Tony Fadell, affectionately referred to as the godfather of the iPod for his part in helping Apple bring their landmark MP3 player to market, says that Apple originally tested three different kinds of iPhone prototypes before ultimately deciding on the multitouch marvel we now all know and love. Fadell, speaking on On the Verge, said a hardware keyboard was a serious considerations. Fadell claims he favored the virtual keyboard approach.
Based on other stories and snippets of stories that have floated around for years, it sounds like Apple was working on a multitouch "Safari-Pad" project while also experimenting with iPod/phone options like the Motorola ROKR. Eventually the tablet got put on hold and, after seeing a demonstration of the "rubber-banding" inertial scrolling on a multitouch screen, Steve Jobs pivoted Apple into what became the iPhone.