There's just simply no chance that the screen stays at 3.5" with the iPhone 5.
It's been almost 15 months since the iPhone 4 was released and there's just no way that after all this time Apple will release what would essentially amount to an upgraded iPhone 4 with the same 3.5" screen as the iPhone 5 (not iPhone 4s--if also released).
The iPhone clearly doesn't have to have to and never will have the biggest screen to remain on top, but at 3.5" vs. 4+" for all the competitors, it would start to be a serious disadvantage. Yes, most iPhone users are different from other smartphone users in that they don't necessarily want as large of a screen as possible, but I think we all have seen the renderings that show that a 4" screen could quite easily be done with only a small increase in overall form factor.
Think about it: smartphones now--and especially the iPhone, are pretty much all screen. Forgetting about the first three versions of the iPhone which were different because the iPhone was so far ahead of any competitor, starting with the 3GS one of the only ways to clearly improve the phone over the previous versions is to increase the screen resolution and/or size.
It doesn't make sense to implement both advancements at once because you need to introduce improvements gradually, so it would stand to reason that the resolution increase comes first, as it did with the iPhone 4. Then, for the very next version you wait an extra 3-4 months over the normal refresh cycle because the iPhone 4 has sold so well, and you introduce a new model with a larger screen.
Plus, another way to think about it is really to back in to some realities that would result if the iPhone 5 didn't have a bigger screen. Mainly, that even after a release of the latest and greatest iPhone 5 presumably in October of 2011 not only would the screen be only 3.5" compared to essentially every competitor with 4"+, but more importantly it would mean that it would be October of 2012 at the very earliest that the iPhone may offer a screen larger than 3.5".
As much as I think the iPhone is clearly the best phone out there, they will start to put themselves at a serious disadvantage if they don't offer a phone with a screen larger than 3.5" until October of 2012 at the earliest and I think they are well aware of this.
Plus, Apple has always done a great job of introducing new products that have improvements over the previous version that are significant enough to make people want to upgrade to the latest version. If the iPhone 5 has the same form factor/screen size as the iPhone 5 with only upgraded specs and camera, I think it will be the first time that a large percentage of previous version owners (iPhone 4) don't feel compelled to upgrade to the latest version. Again, I think this is something that Apple is aware and will not let happen.