The first I've heard of this, and I can't say I believe the article at all.
First of all, they reckon the performance may be reduced. Right, it's just powerful enough to get things done, dropping performance is going to kill it.
Next point is that they reckon the size of the display may be reduced. I'm fairly sure that Apple specifically stated that one of the key benefits of developing iPhone applications was that the display size would remain the same to reduce the need for multi-platform-capable designs.
Finally, they reckon that the camera's quality might be reduced. OK, but I can recall numerous occasions where Apple where flamed for the 2.0 megapixel camera they integrated to the iPhone as it was substandard with regard to competing models.
I'd say that the article is purely fictitious and I see it more as a rumor than anything else.
