I was thinking the same thing, one day it's a rumor, confirmed, denied, confirmed by "insider" denied, rumored, confirmed....
I fail to see any real way they can make it smaller and keep the same screen size without making the buttons impossible to use. Remember the initial square button issues caused by the PSP's "sleak" design in the first place anyone?
If I remember correctly, a lot of PSP owners had an issue with an awkward grip due to the size as well. Make it smaller, make it harder to play in my opinion. I dont think many people have thought this through and have been blinded by the whole "smaller, lighter" thing.
I think Sony need to spend more efforts on getting decent games out before pushing out a new batch of hardware. I mean they should have given polyphony digital a swift kick up the jacksie by now as the GT franchise is a flagship on the PlayStation platform. Shown when the PSP first launched then vanished without a trace, I am doubtful that it will ever see a release to be honest.