One of TechCrunch's sources claims to have actually handled one of the prototypes, and Apple is talking with manufacturers in Asia about mass production of the device, according to the report.
Certainly at that size, the device would be more of a tablet than an iPod, and tablet rumors have been floating around Apple for years.
There was a fury of speculation in August after a number of Mac sites pointed to a U.S. patent application granted for what appeared to be the mythical Mac tablet. AppleInsider published a description of the device discussed in the application, which appears to bring a lot of the iPhone's multitouch functionality to a slate-like tablet computer.
Earlier this year, CEO Steve Jobs implied Apple was watching small-device categories like tablets and Netbooks to see if they actually take off as a mega-trend. But Jobs has also quickly shot down talk of an Apple-produced competitor to Amazon's Kindle, which has been interpreted as a sign Apple was doing just that.
However, tablet PCs in the Windows world haven't sold very well, and the concept has almost completely fallen off the radar screen of the PC industry.