It makes sense. Heck, the April Fool's Amazon *phone* would have made sense, but the idea of a Kindle Color is just too obvious not to happen.
Anyway, link
Anyway, link
I think this is exactly what's going to happen. As for hardware, if, as the author claims, Samsung is building it, my guess is it will be the Galaxy Tab Wifi base: 1ghz OMAP 3630, 7" IPS.In fact, it's entirely possible that Amazon's tablet, like the NOOK Color, will use Android as a base upon which to build a totally customized experience that tightly integrates Amazon services. That integration would let Amazon charge a lot less for its tablet than it would otherwise. The reason Barnes & Noble has been able to price the NOOK Color so aggressively ($250 versus $350 to $450 for comparably-sized and spec'd Android tablets) is because they're assuming you're going to buy a bunch of books from them over the course of owning it.
Amazon will make a similar assumption, except that they won't just be selling you Kindle books, they'd also use the tablet as a platform for selling music (see that cloud locker they just rolled out?), video (you can bet Amazon Instant Video will be a big part of this), and apps from the Android app store they just launched (which is the biggest indication of all that they've got something in the works).