I wouldn't count them out. They've ported NT to ARM. The Windows Phone 7 shell, which runs on CE currently, could easily run as a front end to NT/Win8 on smaller devices. The touch device model and API is fully developed in WP7 and Win7. They have all the pieces in place to release a very compelling product--both from the end-user perspective, in the WP7/Metro shell, and the developer perspective, with excellent tools and a solid OS underneath. Whether they'll do it is another question.