I use mine in bed all the time. Right now for example. Comics and PDFs are what I do most on my tablet. 7" is subpar for most everything one does with a screen on a tablet.
3.5 is fine. If they increased the screen to take up the face of the 4S, I'd be fine with it. I don't type on my phone, so you may have a point there. I only do quick browsing so again its fine, especially with such an amazing UI. Games are perfect as they are normally formatted to utilize the space. Since most are Universal, the ones that use the tablet space better I play there. And they would be lessened on a smaller tablet.
All opinions, but saying a 7" screen is better in design and usability is pretty difficult to debate.
Like I said earlier, as a tablet the Note looks fine, especially with the cool stylus support. As a phone, that's where it breaks down for me.