Why the Large Screen on iPhone 5?

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Apple Employees Test iPhone5 With Larger Screen.

Apple has two big-screen iPhones in use internally, reports 9to5Mac.
They're called N41AP (5,1) and N42AP (5,2).
In English:
Both phones sport screens that measure 3.999 inches diagonally.
Not only is the screen larger, but more pixels will appear in the display, making for a new resolution of 640 x 1136. Instead of blowing up the image, there will simply be more image to see.
The new phones are the same width as current models, but they're slightly longer, measuring 3.484 inches tall.

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