A market analyst with sources "deep within Apple's supply chain" is saying that the iPhone 5 will have a 4-inch display. The resolution will be 1,136x 640, and the aspect ratio will be 16:9, as on a widescreen TV. This compares to the earlier iPhone's 3-5-inch screen and 4:3 aspect ratio. Why 4 inches? More screen space, he says, enhances the user's experience, including being more naturally suited to watching movies. But it's not so much larger that it interferes with one-handed operation or increases battery life. Plus, by simply making the iPhone taller, app developers won't necessarily have to redesign their apps for the larger space. There would simply be some blank space at the top and bottom of the app. He says that a taller iPhone would also enhance user experience by bringing the speaker closer to your ear and the microphone closer to your mouth. You can read more on AppleInsider.
In a separate post, AppleInsider says that the same market analyst believes that the next iPhone could include an HD camera, which would be moved to the middle. He also predicts changes to the rear-facing camera, including the aperture.