This is one of those rumors that will never completely die. I mean, who cares about a smaller iPad? Isn't the current one the perfect size? It seems like people are interested in an "iPad Nano", something between an iPhone and - well - an iPad. A fourth market, if you want.
The latest Digitimes report claims that Apple is planning to release a second-generation iPad in the last quarter of 2010 using 5.6-inch and 7-inch OLED panels. The new models should be geared towards the ebook readers market, as if iBooks on the 9.7-inch iPad wasn't enough. Also:
"The sources also stated that since Samsung Electronics and LG Display have recently been throwing heavy resources into the development of OLED panels, costs are dropping gradually and with Apple's brand image and high average selling price (ASP), Apple should have no problem adopting OLED panels, which have higher price than standard panels, into its devices."
Digitimes has been wrong with its predictions about Apple's displays in the past. They said Apple would sell a $2.000 OLED iPad and it didn't happen. They said Apple wouldn't implement IPS technology and they actually did. I don't trust Digitimes' sources, but there you have it: they're saying we'll have a new, smaller iPad by this holiday season.
I'd rather bet on a lighter, Retina Display-ready iPad 2 by April 2011. We'll see.