I think it's a done deal as they say - the HD is dead, i.e. in terms of being replaced.
In terms of a Zune HD replacement I also think Paul Thurrott is probably right in terms of what he said on Windows Weekly - if, if a replacement comes out, it'll probably sell ~200K units and then that will be that. i.e. Not worth anyone's effort if they're thinking about mass market.
Personally, I would also rather that instead of developing a probably-doomed 'iPod Touch wannabe', they made a faster move to make the Zune portion on WP7 the best darned media experience out there.