As with Intel Macs and CDMA iPhones, I always assume Apple tried out every logical variation of a product in the labs, and has every sensible alternative prototyped and tested as a release candidate before ultimately deciding the best device with which to go to market. So it's not surprise Jim Dalrymple of the Loop confirms a 7-inch iPad has been around since the get go:
The fact is, Apple already has a 7-inch iPad. They have had one of the smaller devices since they started making the 9.7-inch iPad that we have now.
To be clearer, the two devices were developed at the same time. They have pretty much the same specs, except, of course, the 9.7-inch model has a higher density screen than its smaller counterpart.
Whether Apple will ever release it or not is another question. They did introduce an iPod mini (now iPod nano) to their music player line but have thus far not introduced any new iPhone sizes. I'm betting iPad will be more like iPhone: a product and not a line of products.