How can he differentiate himself from Hillary? When he was running against her in 2000 they had virtually the same position on the issues. (He was a little more explicit on crime issues- although Hillary has always claimed she is tough on those issues. And her public statements, at least, on aboprtion were slightly to the right of his. Other than that, pretty much the same thing.)
You're right that Hillary & Rudy have similar positions on social issues. However Rudy has an actual track record of achievement in cleaning up NYC, plus he's an authentic New Yorker instead of some carpetbagger from wherever. I think he could defeat her 2006 senate reelection bid and pretty much take her out of contention as a 2008 presidential contender.
I really wish he would do it since he has about zero chance of winning the Republican nomination in 2008.