On the con side, there's also something to be said for concentrating one's efforts on just a few offerings.
I think the divide with form factors is: does it fit in your pocket? 3-4" phone? Yes. 10"? No. 7"? Still no.
I believe there are so many more use cases for 10" that Apple didn't just pick that number out of a hat. For example, I own a Sony Reader (6"). Great for reading novels. Terrible for technical books (and, by extension, textbooks).
I can hold my iPad on one hand. Thing is though, I don't. I really don't know what the use case is for holding it one handed. It's always sitting on a table or desk, on my lap or on my chest (if lying down).
So, that means they'll have to retool the iOS UI conventions once again. Which means a third target. Universal apps will now have to have usable interfaces on iPhones, big iPads, and small iPads. It seems like a lot of effort to support something bridging a relatively small gap, and I don't think Apple is going to see that as necessary until the tablet market has matured a lot more.
That all being said, I still don't believe Apple is planning a 7" model.
On that note, it'll be interesting to see how Android deals with this. There's certainly a place for 7" tablets... and for 15" tablets, too.
However, such a thing would probably be a lot more pocketable than you'd think. My Kindle 2 (9" diagonal and 3/8" thick overall) fits very nicely into all of my inside coat pockets.
The Kindle 2 also weighs less than half of what the iPad does, which is important; I thought about having a giant pocket sewn in to some of my jackets, but then I realized that I'd need a counterweight on the other side, and I actually got as far as starting the weight-and-balance calculations before concluding that this was getting silly. The counterweight idea would require keeping the jacket buttoned all the time, anyway.
A high-density-screen iPad the size of the Kindle 2 would be worse for movies, photos, and (especially) typing, but I could have it with me nearly everywhere, not just places where I am willing to carry my nerd bag.
I'm sure that Apple has had numerous sizes brewing in R&D since the beginning; the big obstacle is how they'll deal with the software platform. Will devs have three form factors to target when developing iOS, or will a 6-8" iPad have the exact same ratio and resolution as the old one so that everything "just works"?