Stop and ask yourself how may people are willing to carry a 3.5" screen PDA around. That form factor is too big to pocket comfortably, even if thin. This iphone is therefore a jacket pocket or bag or belt clip oriented device - not jeans pocket. And that puts it in a niche category
Windows Mobile PDA phone sales took off like a shot when HTC came out with the Jam ie a scaled down device with 2.8" screen that was at least plausibly pocketable. The PDA2K you are talking about never acheived anything like the mass acceptance of the Jam class - and it was all about SIZE.
IMO Apple is aiming this specific device at people who would carry and archos, business PDA users who are willing to carry a large PDA and early adopters who will spend to be first. This device targeted and priced to cream money off of them first.
They will later on come out with a smaller, cheaper version with screen side in the 2.5"-2.8" range ie where you have decent screen real estate, but the device is actually pocketable. I personally wouldnt buy one until then.
Spot on I say this is targeted at PDA folks. Having owned an I-mate Jam, i share your POV on the futility of on-screen keyboards. But that said, if Apple can be clever enough with predictive text ie take the predictive text on Sony UIQ3 devices as a baseline and advance it from there - they might crack that nut. But we just have to wait and see what they have put in and how it works. At the end of the day, even those of us who like keybaords are not dogmatic - we just want something that works and is fast. If they can pull that off, more power to them.