I don't know what to make of these rumors of a 7" KF. Rumors have been around for a long time about a larger Kindle "Hollywood" presumed to be close to a 10" iPad size, of course, which I still think will happen pretty soon rather than a 7" KF replacement.
That said there is just one thing that would make this rumor plausible; if Amazon had finally decided to use Pixel Qi screens in their color Kindles. Which would make a lot of sense (assuming PQ has the capacity) because at that point all Kindles would have the advantage that the e-ink models have had from the beginning, namely being sunlight readable. That is still Amazon's biggest market distinction between the Kindle and the iPad, and that's what had been synonymous with the Kindle brand before the introduction of the Fire.
Oh, and it just so happens that
Pixel Qi has two new screen sizes; 7" and 10" which went in to mass production late last year (for the 7") and possibly sometime this quarter for the 10".