Yes, I do agree - how much nicer would it look on a 7" screen - just imagine (but I am drooling with the thought)... but why oh why didn't Nokia make the tablets 7" in the first place ?

Because for a nice pocketable Tablet form factor 4" was considered just perfect by the Nokia designers.

Similarly for a pocketable form and use as a Phone form factor, a 3.5" (or ~ 4" to quote Texrat) is an ideal form factor as considered by Nokia, Samsung, Apple, Motorola and other phone mfrs.

Yes granted for those who are not looking for a phone in a tablet - your main quibble can be that why include a phone and drive up the prices, lock down the device, etc etc.
But the main point seems to be stuck at why a < 4" screen on the new "phone" device ? Lets get over that - as that is a part of the best form-factor for a phone (and we know the N900 is going to be a phone).

Its about time we accepted that yes - Nokia has decided to bring out a Maemo phone first rather than another Maemo tablet (which might come later). So if that is accepted, then I think we can now all agree that for a phone, a 3.5" screen seems a good enough fit and not that noticeble a downgrade (in fact I wouldn't want to hold up a 4" or > 4" screened phone to my ears).