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People can discuss whether or not a 7" screen would fit in their pockets, suit them better than a 10", but the main reason for Steve Jobs to say such a thing is the simple fact that a number of their rivals are about to release devices that size that otherwise have superior hardware specs.
Personally, I find my ipad is fine to use at home, but it is a little too big for me to take it everywhere in a jacket pocket like I can do with my ebook reader, my ebook reader is also more comfortable to hold one-handed as well.
In time we will probably have a wide range of tablets filling all the gaps up from smartphones and past the size of the ipad as the market grows in niches all become worth filling.
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