I'm guessing the screen resulation will stay the same, just put on a larger screen.

But, this creates a smaller DPI and kind of ruins the retina display.

I agree with you. I think what people are thinking as a 'larger' screen is really Apple shrinking the phone around the current screen. Apple is crazy about thin and small and I'm sure they want the iPhone to be more like the iTouch if possible.

That or they move more towards the resolution independency thats been around since Tiger.

Think scaleable vector graphics vs pixel. But we'll see.