I doubt an iPod based on a 0.85" HD would be different enough in size to warrant yet another iPod model - after all, they'd still need the screen and touch wheel of some sort, which can't be shrunk down that much. And consider that a 4GB micro ipod would need to be more expensive than a 4GB iPod mini - probably $300.

Though, introducing a $200 2GB model might be a good plan.