Quit posting these stories.
It's not going to happen. You know why? Because Steve Jobs said it wouldn't. If it does happen, that's how you know the management at Apple has broken down, and if you have stock in Apple that's when you should take it out.
Digitimes is just pulling straws out of the air here, we have not seen any leaked parts for this 7.85" iPad whatsoever, which should be a bit suspicious seeing that the iPad 3 is due for announcement in 2 days. It's. Not. Gonna. Happen.
Steve, had a habit of saying a very specific thing wouldn't happen in a way that makes people think it was a very general exclusion. So 7.85 is more 8inchish than 7. Not that it'll every be explained in any details. It's all just an illusionist distraction.
While I think it would be good addition to the line up. Don't think it'll happen this year, but if Cocoa Autolayout gets ported to iOS 6 then I'd put money on a smaller and a larger iPad within twelve months.