Yeah, the hope is (in my mind), that they offer both Wallace and Smith, and then spin it publicly that Smith was their preference all along if Wallace commits to Tennessee. Seems like an option to make it look like Kentucky got their man.
My fear, though, is what if they do see Wallace as a PG? That is very likely his NBA position and he has shown displayed some PG skills, this summer, despite playing off the ball. Maybe they feel like his driving ability will be valuable in Cal's dribble-drive offense, even if he isn't a traditional PG. They may think that a healthy Wallace is less of a risk than a questionable Clark, even a year removed from his ACL injury.
I have a hard time seeing them drop Clark, as they've recruited him for 2 years, offered him over a year ago, and his family even moved to Nashville, as was rumored, to be closer to UK before he ever committed. But recruiting is a fickle business.