General Pace apparently said the same thing, the same week Gates took such fallout for saying it in Committee. I haven't seen where the President said it, but I've been on the missing climbers thread. I think it's in the context of, we're not losing or winning right now, we're just kind of hanging in there.
I don't think he means militarily.
We haven't lost any military engagements. I think he means the country is too unstable, too inept and ill-equipped in every way to begin to stand on its own feet and succeed, which is how the President has defined victory in Iraq.
I just went and looked and saw the quote the president made: "We aren't winning but we aren't losing". And he said that he hasn't heard that the military is "broken" but he has heard from commanders that it's "stressed".
My take: Our strategy was to win not by flooding the country with US military power, but by training up the Iraqi army and police. This has not worked. Good try, hasn't worked. Now it's time to do it ourselves because it has to be done.