I think we need to remember that Microsoft is not selling this concept as a killer of existing notebooks or tablets or smartphones or pdas or anything like that. Not even as a killer of the OQO, which will have a different market because it's smaller.
But it is a new style of device that has the support of Microsoft and Intel and device makers. The form factor is appealing, and the new screen-based thumb board is innovative. It's the sort of device that James Kendrick has been championing for a long time. The hardware, as you say, will improve a lot. Better battery life, more storage, better displays and control layouts, and more software will make the device more and more tempting. Imagine one that has a document scanner built into one of the sides! It could eventually become the first device that could almost support a fairly paperless existence!
It's likely to be one more gadget category that empties my wallet, and I'm sure that's been their plan all along!
Once the new processor versions are available with better battery life, I'll have to take a closer look myself. There are times when a full keyboard is necessary, but there are also times when a UMPC would be so much nicer to use than a smartphone with the tiny little screen. Even if the smartphone continues to be the primary mobile device.