I don't know why people poopoo the idea of a cheaper, smaller iPad. One of the main reasons why people are buying the Kindle Fire is for their kids. They have smaller fingers AND at $200, they can justify buying a tablet for the child. I know someone very happy with the purchase because of Amazon Prime and the free movies and tv shows that you can stream with the annual subscription to the program.
I think children need to be addicted to these things too. They are Apple's future revenue!
Edit: If this DOES materialize, you can bet Steve Jobs knew and approved of it before his passing. I read somewhere that he Apple had about 5 years worth of stuff in their plans before he was too sick to be looking at such.