creating "need"
Arn...I agree with your points. I think we see this issue in the same way.
Rereading that article at Fortune gave me both positive and negative vibes. On the pos side, Jobs recognized that the Palm OS specifically wasn't being used much...and I almost inferred that he has decided against any strong aliance with Palm, which I think is a good thing (however, the whole BE thing might be interesting).
On the neg side, he basically said that PDAs aren't a "natural" device like music is. Hello? As if computers in general are a natural device.
Back to Arn's points...I agree that the wireless thing is vital. Back in the golden age of PDA/Wireless, I had my Newton 2000, connected to my ricochet wireless modem. I could be mobile in my car and connecting wirelessly to check my email. It was in incredible set up, and has yet to be equalled.
Wireless
While wireless broadband would be great, I don't think that is "vital" to the rebirth of the PDA market. I think an always on 28k connection would serve the most important and need functions of wireless PDA. The Omni-sky modems are a pretty close solution, but I've choked a bit on spending $40-50 per month to add that to my visor, which I hate using. If I had an updated Newton, I might reconsider.
Telephony
BTW...most people want their PDA combined with the phone. I go back and forth on this one. The perfect size of PDA, however, is going to be larger than the perfect size of phone, and hence will look funny held up to your face. But, why not develop it this way: make the phone work like the hands-free devices; headphones and microphones in one. You'll already want headphones to listen to your MP3s, why not just add a small microphone to the headphones, and you wouldn't have to hold the PDA up to your face to talk.
Connectivity
I completely agree that the PDA should auto update and integrate with your desktop. I'd love to see 802.11 capability so that where that is available (and I believe access points will continue to increase) then you could surf the net at broadband speeds. Additionally, this would make connection to the desktop a breeze.
Screen Size
I think I've made my point that I don't like small screens. The size of the Newton 2000 screen, for me, was great. I'd even accept it perhaps 20% smaller. But, going in an entirely different direction, what of the possibility of a virtually projected screen wearing some style of eye glasses? This would allow you to make the unit very small (iPod size) and yet have huge screen real estate. The problem is that you still need enough "input" screen real estate for HWR...unless you go strictly with voice recognition, which I don't really see as practical. Can you imagine sitting on a plane and talking outloud to your PDA?
Maybe we should create a lobbying coalition to really create momentum and pressure on Apple to not only do this, but to do it right!