I dunno - a 7-inch tablet with the same 1024x768 resolution as the original iPad might be a smart move. All the apps developed for the original iPad would still work, and it would be a real competitor to Google's little one. Most likely it will have at least 3 capacities though, 8/16/32, in typical Apple fashion.
I am seriously thinking about getting a Nexus 7 for my 2-year-old, but a iPad Mini would be a much more compelling option.
Now if Apple could just figure out how to have both HD and non-HD versions of apps in the App Store, so that the HD versions don't completely fill up our non-HD devices, that would be great...