The Apple iPhone, that is every one of the four generations so far, has had a 3.5 inch screen. The iPhone 4 had a major update in that it became a Retina Display that put 4 times the amount of pixels on the same 3.5 inch diagonal screen.
We now hear rumors hinting that Apple [AAPL] could increase the screen size on the next version of the iPhone AKA iPhone 5 up to a 4 inch screen. The reasons behind this are said to be because of the competition that larger screen Android devices bring to the game.
It isn't clear exactly what kind of screen is being used, ie: will they keep the Retina Display but make it larger, or will they move to a different technology? But, with a launch date rumored for June, we expect that these finer details will already have been decided. We did hear rumors yesterday of the iPad using a Super PLS (Plane-to-Line Switching) display that increases contrast as well as viewing angles, but that also isn't of course confirmed until the iPad 2 is announced (expected in a few weeks time).
As well as bumping up the screen size, DigiTimes also reports that the CPU used in the next gen model will be a Cortex A5 although the speed and finer details are not known at the moment. What it will likely be is a dual-core SoC similar to the custom processor found in current Apple devices.
Of course, none of this is confirmed until Apple announces it, but there's certainly nothing here that's too crazy in that Android devices have larger screens and are beginning to run dual-core processors.