When the Wall Street Journal reports Apple rumors, it seems they always come true, so keep this one in mind:
The WSJ says Apple is readying an iPhone nearly "half the size" of the current models that will have an edge-to-edge touchscreen and could be free with a two-year commitment.
That iPhone Nano as some call it would sell alongside the new iPhone 5 this summer.
Sources told the WSJ that the new iPhone is significantly lighter than the current model. Again, this smaller iPhone would go for sale alongside the a revamped more traditionally sized iPhone 5 this summer.
Now a comment on the half-size thing. Can't see that. I think you can remove the top and bottom parts of the phone and leave a narrow strip around the screen and make the phone significantly smaller but with the same screen real estate. You could also enlarge the screen up and down and add a narrow strip and enlarge the screen, especially when held vertically.
Either scenario would keep the current form factor.