I bet this is not the first time you are hearing about a smaller iPad (or iPad mini) that might have a 7-inch screen. Now, there are more information that this device might really be real.
BTW, the picture above is the Google Nexus 7 and mock up of the iPad mini. According to 9to5Mac, they have received rumors/information that this new iPad mini will be like a bigger version of the iPod Touch. It will have smaller bezel in the portrait mode. It might also have separate volume button and a mic on the back. Not sure if there is camera or not.
And if there is really a iPad mini, it should be out by this year. There are more details (speculations) at 9to5Mac.