It would be just too cool to have touch display netbook that could run both iPhone and OSX applications. Why should this not be possible? Indeed, why couldn't a device like this be a cellphone as well.
It would not need a mouse pad, so the form factor could be much more efficiently managed. Like you, I'd like to see something like 9.5" x 5" (about 4x the size of an iPhone but half the size of a small Macbook. It would accommodate a larger keyboard than you find on Windows and Linux netbooks and yet it would be small enough to fit into the vest pocket of a man's jacket or a woman's purse... something a netbook cannot do.
From Apple's point of view, all this would justify a much higher price than the typical netbook. The problem I suppose is that its popularity would cannibalize the sales of both iPhone and Mac.