I.G.
Try a nintendo DS. At half the price and with many game options it's more appropriate for a kid. It has a touchscreen as well and you can get somewhat educational games for it too.
And don't be afraid to say NO. No way I would ever get a 7 year old a $200+ i-pod touch because they are "fascinated" by the touch screen. That's ridiculous.
Even a DS is a stretch in my book. Not that they wouldn't enjoy it, I just think it way to "grown up" of a "toy" for a child that young. I want my kid to be a kid, not a tween at just 7! That includes going for age appropriate toys, even if they are asking for something else.
Good luck!