YES 7.7" iPad
Given the techno-savvy of many people who post here, the inaccuracies and mis-perception never cease to amaze me.
Calling a 7.7" ipad "just an ipod touch" is flat out stupid. It's like saying an 11" Macbook and a 24" Macbook are really just the same.
Whining about the possibility of the same non-retina number of pixels as the iPad2 is foolish, too. Lots of people were perfectly happy (and still are) with the iPad2, and this device would be roughly 30% sharper than that anyway. Retina would be nice, not having it would not be a deal-breaker for most. Retina would likely come later as screen prices drop, anyway...
It will not come with 8GB as a cost-saving measure. The current component price difference for 8 vs 16GB is what?...maybe $4? Apple will not invite ridicule to save $4.
It will not be super-cheap. Forget $199, and $249 is unlikely, too. $299 is my guess. It will have roughly the same internals as the iPad (otherwise, yes, it would be crap, and Apple doesn't do crap). So the only ways to save money are on the cheaper screen, smaller battery, and smaller profit margin. So don't expect much savings.
Make no mistake, it will sell like MAD. Remember, this is not a zero-sum game. There is not a fixed number of devices that can be sold in the world. Three years ago people here thought the iPad idea was dumb. Two years ago some households had ONE. One year ago many households had more than one. There will come a day when most household have several.
I'm guessing Apple would like to be part of that...