Just a short demonstration of Microsoft's "Origami" interface. One of the drawbacks of a smaller display is that you lose screen estate very fast to toolbars and application icons, which I think would be solved with a MacOS style dock, or using the widescreen potential of the screen and using the greater horizontal resolution to display bars on the sides at least, rather than the bottom (this is also more 'finger accessible' if we go that route).
http://www.microsoft.com/windows/products/winfamily/umpc/action/index_13.swf
The other solution (as above) is to present applications as full screen and use innovative menu systems to select applications and bring them to the front, replacing traditional toolbars and start bars. Click "Home" at the top, and proceed from there..