OK, first off;
I worked for a short time with a team who were making a home-brew version of smash brothers for the DS. This was long before brawl was announced.
The game, I think, was put into hiatus, but with enough backing i'm sure it could be picked up again (the code, sprites and sounds are all still there)
Other than that-
I agree with the 'smash brtohers duel' idea - 1v1... it'd be a much better setup for the system.
I'd say no to sprites (too limiting) but yes to low-rez 3D models.
I think it'd be interesting to allow a choice between fixed camera, dynamic camera (the current version), close-up camera (stays centered on your fighter) and optional fight stats on each screen.
This would allow players to play the game how they want to, and it doesn't matter as each player has their own screen.
I think using the 'close up' on the lower screen would also allow for the stylus to be used to attack.
On top of it all, the game should be condensed. You can get far more use out of most of the stuff in it anyway.
For example; why have so many items?
First off; X and Y should be used for item usage. L and R can be combined into shield, dodge and grab (although i'd make it so that grab came after dodge - it's be quite cool to combine a rolling dodge and a grab to make a grapple, pulling your opponant down to the ground with you)
Picking up an item with x/y makes the character 'hold' it, but not use it. Picking up most items with an attack will do the same, with some exceptions.
Food, tomatoes and heart containers can be picked up with melee attacks, but if picked up with x/y they can be held (saved for later), or even thrown off the stage. They are 'activated' on pressing Y, and thrown with X.
Keep green shells and capsuals. If you pick them up they become melee weapons - slowing your attacks but dealing extra damage. X/Y throws them.
Keep the scope, lazer and fireflower - using x/y 'shoots' them (or throws them when empty). Using a melee attack whilst holding them does extra damage (blunt and flame respectivly), and using a projectile attack incorperates them (so firing them both at the same time)
The metal suit, hammer, shooting star and screw attack can applied instantly with an attack, or held for later. Holding the hammer uses it as a slow melee weapon, but isn't as powerful as activating it. The star, if held, can be activated either in the classic way (fly up, crash down) or like the dragoon (fly away, short time to aim, but less damage). Mushrooms are the same, and no longer activated on touch.
The beamsword, fan, homerun bat and gooey bomb stay as is. X/Y throws them.
No need for larger containers.
There should only be one hero and one villain from each series. I know this rules out some great characters, but it means there will be less clones and more space.
However, extra costumes can be unlocked, which change the stats and some attacks of characters. The exception of the rule would be Zelda; as Gannondorph would be CptFalcon's costume.
For example;
Luigi becomes a costume, but his movement and attacks are still different.
Bowser's costume could be a smaller Petey Piranha; flames replaced by sludge, or Wario (because his current attacks aren't amazing, and buttstomp would be a great move for him).
Zelda/sheik could have Tetra (who's transformations would be between her pirate and princess self - the pirate's attacks would be similar to sheik's ninja skills, but piratey =D The standard special could be a quickshot pistol, for example) to keep up with link/toon link.
Stage wise; with the exception of final destination, keep them roughly Battlefield size and gameboy/DS related (e.g. yoshi's story, wariowear, toon ship, mario bro's scrolling map, game and watch etc)
