It's just fun and easy to visualize this. All the people crying apple won't do this because fragmentation, ease of use, ect, honestly doesn't hold water IMO because apple can shrink down the iPhone 4 considerably while still keeping that 3.5in display!
Now, which one of these 2 phones do you want to cram in your pocket numerous times a day? The question will be: What will they skimp out on? Maybe it's possible for them just to keep the "Nano" sized iPhones 1 generation behind in hardware internals, and possibly keep the storage at 8GB, and still have that $200 price tag? Can they include a retina display?
I'm far more excited about the prospect of a larger screen'd iPhone 5. Four inches at least, please! Pretty sure that's not what she said.