Given that the iphone is quite portable and a 4.5" model is all but assured, I'm not sure I see the point of having a 7" tablet. The issue with the 10" is that it's not quite as portable as some people would like -- but the 7" seems to fragment the product line a little too much given that you already have the ipod touch.

On the other hand, the one way I could see this working is if they reshuffle categories such that the lower resolution iPads and the iPod touch fade away to be replaced by the 7" wifi model. That would make some sense.

EDIT: Ooops, 4", not 4.5"