It could be argued that a 3,5 inch screen is well tucked in with 480*320 pixels, but current rumours whisper that the iPhone 4G will sport a new, densely-packed 960*640 screen which closely mimes the iFrame video format as well as a front-mounted camera (finally!) More pixels means more CPU time and processing power; it means more heat and the necessity of better dissipation methods. Will it mean a larger iPhone? There are a lot of questions, none of which can be answered now, but stay tuned here as speculation turns to ratification.
Last summer, TouchMyApps discovered that the iPhone 3GS IS capable of playing back HD content, but it seems that Apple have tried to hide HD from iPhone 3GS owners. Perhaps they may push it as a new feature in the: iPhone 4G/HD.