Perhaps the ironic thing is that the .NET 4 Touch SDK is actually pretty decent, as is the C# language compared to Objective-C. Combine that with some rather nice database, connectivity, and kernel technology and there's really no technical reason why Microsoft SHOULDN'T be able to make a kick-ass touch device. What they appear to be utterly incompetent at is using technology to build an actual solution to consumer needs and integrating well into a consumer's life. They still seem driven by the feature checklist and battling their competitors rather than just building good stuff for people.
Yes, but Ballmer wants Windows 7 on a Tablet, not their mobile OS. Windows 7 means having tablets with basically the specs of (at minimum) a cheap underpowered netbook running an OS designed for desktops with a keyboard and two-button mouse. If you want a thin & light tablet with long battery life & superior usability, this isn't the magic formula. In fact, this is a recipe for the exact opposite. Remember Project Origami? Microsoft has already tried this. All it does is make users wish they had a more powerful laptop with a real keyboard. And ironically, since the price bottom fell out of the PC laptop market, it's probably a better value to buy a decent laptop instead of a crippled Windows 7 tablet.
The .NET 4.0 Touch API is part of Windows 7 (it's what I was referring to). It's actually a pretty nice API and would enable some pretty decent apps. But again, Microsoft is trying to solve problems with technology that aren't technological problems.