Kyle Baxter breaks down the advantages vs. disadvantages of a smaller version of an iPad (e.g., a 7″ to 8″ display):
I have no doubt that Apple is working on a small iPad, but that’s a separate question of whether they will actually release it.
Personally, I don’t like the idea of an iPad Mini, iPad Nano, or whatever name. I’m not entertaining the idea of getting both, if there will ever be a smaller version. And I hate debating with myself which screen size should I get.
I’m already spending a lot of effort deciding whether I should get the new iPad (3rd Gen) or settle for iPad 2. And I’m already sick of deciding. So please put a stop at my agony.