Exactly. Many keep saying it won't happen because Steve said 7" tablets don't work, they're too small to tap regions accurately, would require apps be updated, and so forth. But what Apple are apparently testing isn't a 7" iPad, it's really an 8" iPad, and that makes a significant difference. Steve wasn't lying, Apple really did test (and probably still are) various sizes for the iPad and found 7" doesn't work, but he didn't say anything about 8" tablets (deliberately I'm sure).
The Kindle Fire and several other early failed Android tablets really are closer to (in some cases exactly) 7" than 8" though and they really do suffer for this small but vital difference in screen size (aside from other shortcomings of course).
If Apple don't do a smaller/cheaper "iPad mini" it'll be because they don't see it as being necessary/profitable, not because a smaller screened iPad is impossible.
BTW - we should stop referring to the current iPad screen as a 9" too, at 9.7" it's closer to a 10" screen.