I'd agree that the original Eee is too limited. However, the 9-10 inch netbooks have a resolution more viable for simple everyday computing, and most of these have 1GB of RAM, leaving XP reasonably happy to do its business, at least so long as you don't get too optimistic.
Having said that, there are entirely separate reasons to take an interest in a netbook. Let's see, decent battery life and small size - note-taking in classrooms or lectures, ebook reader, movie player, porn browser, etc... applications where the larger screen and/or reasonable-sized keyboard offer a clear advantage over smartphones.
Don't get me wrong, I'm a smartphone user rather than a netbook user, but typing any serious amount on an E71 is rather more taxing than on a proper keyboard, and the screen just isn't big enough for media playback. There's a degree of convergence, and I can see the specialised portable DVD and media players as the first casualties, as the smaller of their kind are picked off by smartphones and the larger by netbooks. Ebook readers such as the sony device will also look overpriced compared to surfing/colour/movie-capable netbooks, and may also find it hard to enter the market.
As people have less money to spend, netbooks will lose some who no longer have enough to spend, but will gain others who decide a netbook will suffice over a more expensive laptop, so it remains to be seen how much they'll get hit.