Part of the slowdown may be the cost of getting bits to the screen via the normal WinCE interface. Yoshiki Ohshima found that using the windows games API gave a huge speedup in display update speed.
As you surmised, I am already using Ohshima-san's VM. And I concur with you that the raw computational power of the iPAQ is impressive. So those should not be the problem. MVC responds acceptably, but Morphic is a dog. I have not yet tried an image with Ned Konz's Morphic optimizations, although if they only yield a 28% improvement, that won't be a big help.
Another possible source of sluggishness is floating point operations
Is Morphic more dependent upon floating point than MVC?
there may be an unexpected interaction between Windows CE and event
processing.
That would impact Morphic but not MVC?
I don't have an old image available ... I just started playing with Squeak recently, and Ned Konz was kind enough to help me get directly onto Squeak 3.
Might I ask what your image prep method looks like, which generates for the iPAQ? I'm using one that is derived from both Fisher's and Ohshima's, and learned from each one.
--- Noel