arenaman: if you want to blame someone for the near-death of native hardware, blame it on the guys who failed to deliver any kind of ARM processor that is much faster than what the IYONIX uses. According to the old MPF presentation from Samsung, we should have a 3 GHz ARM10 variant by now - where is it?
Castle did a fine job creating (or taking over) the basics for not-prohibitively-expensive hardware development - a hardware abstracted OS. Unfortunately, the only thing they have not abstracted away is the ARM processor.
Since the delivery of the StrongARM, the gap between x86 based processors and ARM processors has been widening. I don't think that it is very likely that ARM processors will catch up again. Therefore, the emulation idea is inherently sensible. Whether selling an OS for an emulator is generating enough money to keep on developing the OS - I'm not sure. It would at least reduce the cost of development significantly, since the many man hours spent into fine-tuning graphic card drivers and USB stuff could be saved.
The only real problem I see is that going completely emulated will suddenly shift the goalposts for software developers significantly. Certain "classes" of software will no longer be sellable into the RISC OS market. It remains to be seen whether this will pose a problem.