Sources also suggest that a smaller iPhone wouldn't necessarily be cheaper to produce (and hence, sell), and adding yet another screen to the lineup wouldn't be fair to developers, something we recently pointed out with the power of math.
Meanwhile, the same sources suggest that Apple's MobileMe suite of services, which has failed to catch on at US$99, will become free and allow cable-free synchronization."The goal is that your photos and other media content will eventually just sync across all your Apple devices without people having to do anything," a source said. MobileMe could allow Apple to use less internal storage on iPhones, reducing one of the most costly components.
Those waiting for an iPhone the size of a postage stamp should keep the vigil candles burning. In the meantime, let's focus our baseless assumptions on iPhone 5.