Here's a few differences:

(iphone/8525)

Talk time: (8hrs./5hrs.)
Screen size & Resolution: (2.8"/3.5") (240x320/320x480) iPhone screen is 25% larger!
Memory: (4-8GB/51MB,microSD expandable)
Dimensions: (4.5x2.4x0.46/4.43x2.28x0.86) iPhone is 47% thinner!
Weight: (4.8oz./6.21oz.) iPhone is 23% lighter!

Big selling point for me is the user interface/simplicity/cool factor, and Apples more stable OS X compared to Windows OS. Sure there are some downsides when compared to the 8525 i.e. no 3G support or push email but this is currently aimed at non-business users, so not a deal breaker for average Joe consumer.

Given the choice, I will always opt for the smaller/lighter phone with the larger display!