The 3.5 inch iPhone is still a very usable device. I'm on an iPhone 4 right now. The screen size is not the problem for me, but it has gotten too slow for my needs. Some apps don't behave properly and consume too much of the CPU and resources, slowing down the experience for all other apps, even when running in the background. So for Apple to continue to offer a current-generation 4 inch phone would be a very smart move. There's definitely a market for a device of that size.
right. I'm speculating and I didn't say there wasn't a market for it... just that I think it is not going to happen... I've elaborated in further posts that if it does, I would not think it to be one of the "flagship" devices, but they may position it as they did the 5c -- a "budget" offering.