I wouldn't quite count out the UMD just yet. The new PSP redesign with video out is only going to help sales of the movies, especially since they are encoded in 480p. Now if they just offer the videos at a more reasonable price, the format could still have some life. And it sounds like Sony execs understand this. Check out this Kotaku interview of Jack Tretton: http://kotaku.com/gaming/kotakutalku/jack-tretton-on-future-of-umd-278504.php.
Along those lines, there's a movie/music download service that's on the way that could be successful.
Also, we're still really early into the life of the system. It's only been 2 years and 4 months since it came out. If it has a 5 year lifecycle like most game systems, it's not even half way done. Again, I think the redesign will help bolster sales at least for this holiday season, which will probably be its best season to date.
My Top 5:
Shadow of the Colossus, Metal Gear Solid 3, Shenmue, Skies of Arcadia, Chrono Trigger
My 2 nex-gen systems: PS3 
and Wii 
Prediction Aug '08: We see the PSP2 released fall '09. Graphically, it's basically the same as the current system. UMD drive ditched and replaced by 4-8gb on board flash memory. Other upgrades: 2nd analog nub, touchscreen, blutooth, motion sensor. Design: Flip-style or slider. Size: Think Iphone. Cost: $199. Will be profitable on day 1.
