Apple has a working prototype of a 7.85-inch iPad in its labs, according to noted Apple pundit John Gruber.
Confirming the information on a podcast, Gruber said that the 7.85-inch iPad sports the same 1024x786 resolution as the original iPad and iPad 2, meaning apps designed for iPad and iPad 2 would run fine as is. Gruber described the device as "usable" but having "smaller text without being ridiculously small".
Gruber first talked down the idea of a smaller iPad, calling it "one of the ideas they (Apple) are noodling with" and that he had "no idea if they are planning to ship it". When pressed further by co-host of the podcast Dan Benjamin to "speculate", Gruber said Apple could release the 7.85-inch iPad "probably at this year's WWDC" since Apple wouldn't release a "new phone within an year of the previous phone". WWDC is Apple's Worldwide Developers Conference, generally held in the month of June in California.
Quoting Steve Jobs' famous line about Apple being "as proud of the things that they had chosen not to ship, as the ones that they had (shipped)", Gruber said, right now, he saw no reason for Apple to release a smaller iPad but that could change in the future. This, he said, would depend if smaller, cheaper tablets like Kindle Fire, became more popular than they are right now.
A "cheaper, smaller, slower, non-Retina" iPad could serve as Apple's insurance, should such tablets get popular in the future. Gruber said a $199 or $299 price-point would be suitable, given the target audience for such a device.