The greatest reason why I believe Apple should not release a 7-8" iPad.
The iPad’s equivalent to the iPod’s music is applications. That’s what we use them for, that’s what we spend our money on. But here’s the problem: applications designed for the large iPad are not necessarily going to work so well on the small iPad. Let’s say the small iPad’s screen resolution is 1024×768, so it could run current iPad apps at a reduced physical size: many applications are going to be way too small.