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A 7-inch iPad. Apples answer to Amazon's Kindle Fire.
The one thing with Apple products, you can always count that if Steve Jobs said "We will never do this!" its going to be in the works.
Examples:
Large format iPhone like device New version of Apple TV Small form factor tablet
Link Please.
If this were true, I'd be all over it. I work with iPads at a video-game production house, and I've always found them to be just slightly too large to be truly portable and useful.