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My prediction is that the device in production is not a small iPod, but rather a wi-fi remote control that looks and works like an iPod, and interfaces with the Airport Express and AirTunes. It would not have any music storage, but instead would import the XML file from iTunes, which would only require a small amount of flash RAM. It would probably be the form factor of the iPod Mini, but thinner.
If they make one, I will buy it.
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I can't read your signature. Sorry.
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