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A lot of people are pretty excited about the Pebble watch, although of course that may be a completely different product that whatever Apple comes up with. I think you make valid points about the limitations of a display the size of a large postage stamp. Still, I could also see its usefulness at times. For me, that would mainly be the ability to check incoming SMS and email without pulling my phone out of my pocket. Really, I don't know what else I would use it for. One thing that really annoys me is people pulling out their phones and putting it in front of their faces while talking to me, so I guess having someone glance at their watch would be a slight improvement.
It's interesting, and I would like for someone to give me one (hint, hint), but at this point it isn't compelling enough to spend $150. As more developers come up with innovative uses, that might change. Also, whatever Apple comes up with might be radically different than the Pebble. If it reached the point of actually being a smartphone on your wrist, that would be pretty cool, although the screen size would still be an issue.