http://www.macworld.com/article/154980/2010/10/jobs_transcript.html said:
One naturally thinks that a seven-inch screen would offer 70 percent of the benefits of a 10-inch screen. Unfortunately, this is far from the truth. The screen measurements are diagonal, so that a seven-inch screen is only 45 percent as large as iPad’s 10-inch screen. You heard me right: just 45 percent as large.
If you take an iPad and hold it upright in portrait view, and draw an imaginary horizontal line halfway down the screen, the screens on these seven-inch tablets are a bit smaller than the bottom half of the iPad’s display. This size isn’t sufficient to create great tablet apps, in our opinion.
While one could increase the resolution of the display to make up some of the difference, it is meaningless unless your tablet also includes sandpaper, so that the user can sand down their fingers to around one-quarter of their present size.
Apple has done extensive user testing on user interfaces over many years, and we really understand this stuff. There are clear limits of how close you can physically place elements on a touchscreen before users cannot reliably tap, flick or pinch them. This is one of the key reasons we think the 10-inch screen size is the minimum size required to create great tablet apps.