Honestly, I saw the iPhone in flesh here in Germany. And all I can say is that I'm not impressed. It's an ugly big brick! There are plenty phones on the market, that are equally slim/slimmer, smaller, more sexy and more functional.
Beauty is in the eye of the beholder, I guess - I think that the minimalist look of the iPhone beats all the phones that are covered with buttons and keyboards, but that's my opinion.
And why is smaller better? The tinier the screen, the fewer pixels you can view at any time, unless the display resolution increases to compensate, making the screen unreadable.