Drew - I was in a similar situation a few months back. I already owned a D700 and Canon 1DS and was looking for a P&S-sized camera, but with SLR functionality. After briefly looking at the Canon G11 and Panasonic GH1, I just happened to buy a K-7 for my sister as a wedding gift and was taken by it's small size and feature-set.
About a month later I picked up a K-7 for myself, along with the 15, 21, 40, and 70 limiteds. I've been very pleased with the system. Image quality and color is great, WB, metering, and its controls are all excellent. I like having the HD video available too. To my surprise, I even sold my Nikon 105DC F2 in favor of the 70 and/or 77 limiteds.
My few concerns with the K-7 have been its noise levels at moderate ISO and its AF tracking capabilities. Noise is a lesser concern for me. I find it acceptable up to 1200-1600, then I pull out my flash. Plus, I still have my D700 when I really need it. I recently added a 50-135 to test out the K-7's AF tracking abilities. My preliminary results when compared to my D700 and 80-200 AF-S showed the K-7 to be a step down from the D700. No great surprise here, as the D700 has one of the best AF modules currently available in the dSLR world. However, I would say the K-7's AF tracking is still usable and capable, just not quite in the same league as the D700.
Bottom line is I'd likely have more keepers when shooting action shots with my D700, than the K-7 - but it would be at the "cost" of a much bigger, much heavier, and much more expensive system. I still need to do further compares and under different scenarios to really see.
(Taking this shot was the first time I've actually needed 3 bodies) :-)