There's plenty of proponents of the 7 inch form factor and some really good hardware of that size (chief among them for me is the Galaxy tab). 7 inch factors are great on-the-go consumption devices for all sorts of media and certainly have portability advantages over their 10 inch brethren. You are right though - these are a compromise. Try creating content on these puppies or updating blogs or somesuch. Not always an easy experience.
For me, the Streak 5 fills this niche. Small enough for the pocket, big enough for web surfing, blogging and media consumption, small enough (just!) to be a mobile phone. Pairing a wi-fi 10 inch tablet with a 5 inch 'smartphone' in hotspot mode on a good data plan is a good way on getting the benefits of both platforms without the need for the device sprawl of a separate phone, laptop, e-reader and tablet device.
Samsung's new 5 inch Tab will be one to watch when it launches, methinks.
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