It is not the ultimate device, until someone invents transparent fingers. ;)
I believe that it depends on the specific application. For some applications a mouse is better than a touch screen. Image you would have to touch your PC's screen. For other applications touch screens are perfect and for some applications speech recognition is better. For a game, a joystick could be superior.
I don't think there is 1 ultimate device.
You say that "our finger pads can't be smaller than their physical size - or is there a touch solution to this problem as well?"
In fact I am amazed by the precision of the iPhone's touch screen (and probably Android devices as well, I don't want to start a war here). When browsing a non mobile website on it, it becomes clear how precise the touch position is determined. Even if I need to click links that are very close to each other and each is a lot smaller than my finger, somehow it always seems to select the correct link. Not that this is perfect but I would not consider the size of the finger as an important shortcoming. It certainly works much better than touching the screen with a little pen.