According to various sources on the matter, Apple is set to release an 8 GB iPhone 4 which will be aimed at lower ends of the market. The phone will be cheaper than the current iPhone 4 which also only comes in 16 and 32 GB versions. The original rumor was that Apple may product an iPhone 4s which would be a smaller version of the iPhone 4.
The source is a Korean based manufacturer which claims to be building the 8 GB flash memory for the phone.
An iPhone 4 with lower storage is fine for people that do not need that extra storage. I take a lot of pictures with my iPhone 4 and need that extra memory because currently there is no way to tell the iPhone 4 to take pictures at lower quality to take up less space.
The cheaper iPhone 4 may include lower than normal specifications to help drive the price below the $200 or even $150 mark. The challenge for Apple will be to release a cheaper phone and still turn a profit.
In addition to the launch of a cheaper iPhone 4, Apple is still set to release the iPhone 5 this October as well.