The reality is that not only they are in the same category in terms of pricing, they are also in the same category in the terms of battery life, etc...

If you put WinXP (or OSX, or even full-fledged Linux) on a machine, you get the same constraints as to computing power, disk size and interface than on a desktop. No surprise.

The idea behind a handheld is to redesign the system so that you DO the same things using less power, footprint and money. What do I do: I type text, do spreadsheets, run a calendar... all things which were done on a PC-XT running at 8 MHz. I also need network connectivity, web, mp3, maybe the odd animation. Why wouldn't that work on a palmtop?

Unless your web connectivity implies 3-D games and bloated web pages, it should work. What do you use your WinXP machine for?