What Microsoft should do to win the competition
Danger of iPhone.
I really think Microsoft should be quite aware that the 3G iPhone is coming to Japan. Microsoft should be aware that the user interface of the iPhone is very well made. I am not saying that Microsoft's user interface is bad, but it's very hard to use at times because the interface is bloated with many menus.
Lowend models
Also, the Microsoft should begin to see a new market in low end models, with a shell on top of the Windows CE OS. As more developers become interested in making their own models of Windows CE devices, Microsoft should provide easier development environment other than eMbedded Visual Tools or Visual Studios (Ones that an average entry level users can master).
Price Range
I remember when there used to be the PC-Ephone II which was an interesting device. The problem with the device was the cost of it. 60,000yen was the price, and that was quite expensive for an average student. Also, only 256 colors could be shown (very bad if you wanted to view video on the device) I personally think that a device costing about 19800yen (the price of my first PDA, the Cassiopeia E-700WE was this price) is good.
College Students
Microsoft should be noting the fact that average college student will not be wanting a device costing nearly $800 (Tytn II was a good example), but instead something that costs between $198 to $300.
Futuristic Ideas
There should be more emphasis on the video playback, and I think a device running Windows Mobile 6.1 with a integrated Wifi or WiMax with HSDPA and GPS would be great.
Women and Girls as a huge market.
Also, the target for women and girls is a good way to go. This is very simple, put out the colors such as red, orange, pink, angel blue,etc. 
(very good for Willcom who put out a pink W-Zero 3). There should be more compactness in the device, and a cute clamshell device with fancy LEDs will be nice. I happened to notice that Windows Mobile devices have less fancy LEDs which will definitely be cool looking.
