From Neowin:
A prototype of a new device—described by sources as a type of hybrid Tablet PC/eBook—has been making its way around the Microsoft Corp. Redmond campus, according to sources. The mini-Tablet, which measures about six inches by eight inches and features a digitizer, is just one of a number of new Tablet form factors expected to debut in the coming months.
The source also brings us a picture of this prototype with some additional specs. It's a "PC the size of a PDA", with a Pentium M ULV 600 and Wacom. It runs Windows XP Tablet PC.
Interesting, although I see this more as an evolution of the PDA paradigm than anything else. The use - writing on the screen, etc - is already well understood by PDA users. If they can get that same form factor, why not. The more important question, I think, is whether it is "instant on".