A Taiwanese manufacturer named Host Optical has provided photos and information to iLounge claiming that they are manufacturing two smaller touchscreen displays—and at least one will be used in the new iPhone. The screens are smaller than the current gen iPhone at 2.8 and 3.2-inches and they are touted as having a "projected capacitance touch panel" that does not lose sensitivity over time, is more durable, waterproof, and resistant to high humidities and temperatures.
As always, information like this must be taken with a grain of salt. Apple manufacturers rarely discuss their affiliation with the company and there are plenty of manufacturers out there that deal in iPhone knockoffs. However, the information is consistent with earlier rumours about a shrinking iPhone, but even if it is true, I highly doubt it is anything we would see right away—especially if the 3G iPhone is toting around a larger battery and GPS. [iLounge via Electronista]