Never say never...
And I bet it does happen.
Many people, including myself would like to have a more smaller/portable iPad. I have the iPad. There is nothing wrong with the 10" but I feel it's more for around the home as the main machine for most or the business travel at work machine.
A 7" would be more idea for daily commuters, kids, on production shoots, etc. I do see more people walking with Kindles then I do with iPads. I never see iPads out in the open when people are moving/walking, etc. Barely see them on the METRO, etc. I do see Kindles everywhere..on the METRO, BUS, people walking, etc. I see iPads in coffee shops, restaurants, deli's, etc...so there is this metric where the iPad is just too bulky for on the move for most people.
The 7" size is great for portability.
In terms of the iPhone, the iPhone is too small to do most things on. It's great for on the go, but in terms of apps, and other things, most iPhone owners I know say they'd rather have something bigger for social networking, checking emails, etc...and they are more sales oriented people.
My friends kids have iPod Touches and they have an iPad for the family. Guess what device the kids want to use more. Now imagine if they had 7" iPads for kids.
And yes, clothing can adapt to have a pocket inside your coat, jacket to fit a 7" inch iPad.