The "retina display" screen present on the Apple iPod Touch and the iPhone 4 is a mere 3.5-inch diagonally and has a resolution of 960x640 pixels; in effect both devices are tiny tablets as they're controlled by human fingers.
Yet, while Steve Jobs said that research shows that you'd need to "sand paper to sand down your finger" to use a 7-inch tablet, he forgets that the same finger(s) are being used on more than 100 million iOS-based iPhone and iPod Touch devices worldwide.
How is that possible? Well it's down to how the applications are being developed and the actual screen resolution. The iPad has a pixel density of only 132 PPI (pixels per inch), which is the lowest of all portable devices launched by Apple (yes that includes the iPod Nano 6G) while the iPhone 4 and the iPod Touch 4G reach 326 PPI, more than twice the amount.
In other words, you'd be nearly be able to cram a full HD resolution (1920x1080 pixels) in the iPad's 9.7-inch diagonal if Apple wanted to do it. Conversely, the Samsung Galaxy Tab has a pixel density of only 171 PPI, not far from the iPad's.
Steve Jobs is plain wrong when he claims that a 7-inch screen size doesn't make sense. If 9.7-inch and a 3.5-inch models have been popular enough to get developers to recode tens of thousands of apps, then a 7-inch model would certainly work.
In reality, the reason why Apple doesn't want to get a 7-inch model out on the market may have to do with the fact that it is likely to jeopardise sales of the 9.7-inch model. After all, Apple had only one iPod at launch in 2001 and it wasn't until 2004 that it launched a smaller version.