I am pretty sure something like this will happen at some point... Biggest problem is screen size (not resolution) and cost.... Software already exists to run DoS and Windows 9x on WM (Though its slow...)
My personal guess is as soon as somone comes up with a decent Wireless connection to a monitor, our phone will truely start replacing notebooks (at least the small ones.)
For the sake of arguement, lets say most people start using Wireless Firewire (made up tech) for ALL mice, keyboards, and monitors. As soon as you put your phone in range of the wireless dock, it becomes the CPU for everything... The only thing extra you might have at home would be additional personal storage, but everywhere else, all that will be needed is a KVM dock... Ad it should be easy to make a Notebook like KVM dock too for those needing it... Remember you heard it here 1st...
