Dustin Curtis on why Apple sticks with the 3.5 inch screen:
I pulled out my iPhone 4 to do a quick test, and it turns out that when you hold the iPhone in your left hand and articulate your thumb, you can reach almost exactly to the other side of the screen. This means it’s easy to touch any area of the screen while holding the phone in one hand, with your thumb.
Makes a lot of sense. Not to mention the pocketability of this size.