I heard a rumor back in January about a new gadget from Apple with a touchscreen display that would cover the face of the thing. It was supposed to be the video iPod so I thought the screen would have to have a 16x9 aspect ratio. When I started doing mockups, the dimensions didn't match up with anything Apple had like the nano or the iPod. When I went back to my source with this, he said yes, it would be a different size between the nano and the iPod. I couldn't understand how that'd be good for a video iPod.
That rumor turned into this TS article on Feb. 9: True Video iPod to Sport 3.5" Display
At the time, it was believed Apple would release it in March but when I checked back with my source in March, he said there were problems with the display and that the thing went back to the drawing board. From what I can tell, that's exactly what happened and the project was reworked from the ground up.
Recalling these old rumors and looking at the latest rumors about the phone effort, I think this video iPod and the phone are one and the same. The thing gnawing at me 10 months ago was the idea that a full screen 3.5" iPod would have to be smaller than a regular iPod and I couldn't reconcile that with an internal HD large enough to store lots of movies. Ah, but if you think of an iPod that's flash based and sized between the nano and the iPod, the display makes sense but not so much for movies unless the 8GB model has enough capacity to make movie viewing worthwhile.
A 3.5" full screen iPod phone makes a lot of sense since the display can let the device be anything you want it to be with virtual clickwheel and virtual buttons. I can't wait to see what Apple comes out with.