Apple could be planning to launch a smaller iPad in time for Christmas 2012. This new iPad would follow along from the iPad 3 that is expected in April. The difference will be the screensize of 7.85 inches as opposed to the regular 9.7 inch iPad screen we see on the yearly generation changes.
Although Apple [AAPL] has dismissed a smaller iPad before, this was before Amazon made the 7 inch Kindle Fire successful in the last month. Now that there has been some real success in the mid-range screensize arena, this could be what Apple has picked up on. Digitimes is reporting that Apple is already preparing for an "iPad mini" by ordering a number of the smaller screens from LG Display and AU Optronics.
I have mixed thoughts on two different iPad sizes as Apple has stuck to two screen sizes in the past. The iPhone and iPod touch have always had 3.5 inch displays while the two generations of iPad have each had a 9.7 inch screen. I'm not saying it wont happen, but believe Apple will stick to an already popular screen size that is clearly working for them while leaving others to do what they think is best.
If Apple did go ahead with the smaller mid-range device, perhaps the cost would be cheaper making an iPad in the $200 - $300 range thus making it affordable to more people. With subsidies on a 3G version it could bring the iPad mini close to free over a 12 or 24 month contract.
Digitimes is hit and miss with reporting on future products, so at the moment it's difficult to know if the rumour has any substance to it until we hear more from other sources.