They've probably sunk so much money into the project that developing it further is the only way they can get a return on it.
The meeting probably went something like:
Nokia Boss: N-Gage is dying on it's arse. Why?
Nokia Peon: It sucked.
NB: Why did it suck?
NP: How long have you got? The screen was too small, the battery life was probably too short, you need to take the battery out to change games, and Nintendo has a stranglehold on the handheld market.
NB: Okay, we can't do anything about Nintendo, but we need to get these N-Gage games sold. Make the screen bigger, cut out the mp3 player so people aren't using the phone as a phone/game/mp3 player (making the battery life longer because it's in a passive state more often), and move it's game slot.
NP: We bought a shitload of those screens in bulk - we've got loads left.
NB: Crap. Can we make it look bigger?
NP: We could turn it around.
NB: That'll do. Did the games suck?
NP: I don't know - I've got a GBA.