Divide the screen into three or four horizontal lanes. These represent the frets. Have the notes come from left-to-right across the screen, perhaps with some sort of 3-D effect to give them more time on the left side. Use your finger to move up and down the right side of the screen, then use your other hand to press the space bar or hit the five-way navigator to strum the guitar. Effectively, you're using the finger movement to emulate the multi-finger fret board on the console 's guitar controller. You couldn't do chords with this, but I bet you could do hammer-ons and hammer-offs with this kind of interface.
You could invert this control scheme by using the four app buttons as the frets and strumming with the stylus, but I think that wouldn't feel as nice, as it would be harder to work with; it might also suffer from multiple button detection woes.
I've got no time to try to implement this right now, but if anyone wants to steal this idea (all I want is a little credit), feel free.