Put your iPod up to your face. This is how big the iPhone will be.
Here's the iPod compared to the current market. On the smartphone side, it's got similar functionality, but it's much thinner than the Cingular 8525, our current favorite smartphone (which incidentally runs Windows Mobile). The iPhone also doesn't have 3G.
On the music side, it's got the memory size of an iPod Nano, but needs to cram in a lot more features.