I think the main problem this past year with UMPC's isn't so much one issue but a combination of many things.
1. To begin with, they were all stuck at the 4-5" screen and the 7" display didn't come out until the end of the year (not even really out now yet, but it looks hopeful).
2. Secondly, the availability of the product has been quite limited. The only one you could readily find was the Sony and it was thicker than the average laptop. If Sony would have slimmed it down quite a bit and got rid of the useless dead-space surrounding the screen, it would have been a much better product.
3. The last, and most important, factor I can think of off the top of my head is pricing. Why would someone in their right mind drop $1200-1500 for an UMPC, new pricing, when a much better and faster laptop could be had for half that cost? The whole point of the UMPC was to have a sub-$700 price range to pull people in, but none have come near that figure.
Now that the 7" UMPC's are starting to surface we may see some of those figures shift, but if they stay priced at uber-laptop rates it will be a tough sell. I'm still waiting for the HTC Shift... hope it doesn't disappoint!