The article also makes mention of a jumbo-sized iPod touch of sorts (an iTablet, if you will), but it's hard to tell if that word is from these same people familiar with the matter, or if the WSJ is just picking up that perennial rumor from less reputable sources.
We think the answer to that is "both". Apple no doubt has an iTablet in the vault deep beneath Cupertino. Indeed, the iPhone reportedly began life as the Safari Pad tablet. Steve Jobs simply hasn't believed there's a market for it yet. Perhaps he's now changed his mind and Apple will finally release a modernized version very similar to a large iPod touch.
[Thanks to everyone who sent this in!]