Personally, I think 9.7 inches is a perfect size for a tablet. I don't think Steve Jobs would have released the iPad in that size if he didn't also think it was the most optimal size for this type of product. That's why I doubt we will ever see a 7 inch iPad.
The reason its an optimal size is its big enough to comfortably view web pages and interact with apps. Any smaller and you would be pinching and zooming most web pages, and have trouble navigating certain apps.
The only reason you would want a 7 inch screen is portability, since you would be sacrificing screen space. However, I think almost anyone that would buy a tablet device would also have a smart phone too. Since they have the smart phone, they don't need to bring the tablet out with them, and therefore they wouldn't want to sacrifice the screen size.
Tablets are designed to be mostly kept at home, and maybe taken on overnight vacations. They are not carry around wherever you go devices, that's for smart phones. Therefore, I think these companies making 7 inch tablets are just trying to save money and differentiate themselves from the iPad. However, I don't think people will want the smaller size, and these tablets will all be middling products that won't succeed, akin to the Zune.