During his Talk Show podcast with Dan Benjamin, Gruber reports that he has been told by “numerous” people that this size iPad is something Apple has been “noodling with”.
Gruber said sources had told them that Apple have one in the lab, “A 7.85 inch iPad that runs at 1024×768, it’s just like the 9.7in iPad shrunk down a little bit. Apps wouldn’t need to be recompiled or redesigned to work optimally on it. It’s just the iPad smaller.
However, Gruber noted that the product may never ship.