Despite the hype the battery isn’t likely about to revolutionize the auto industry. More or less since the car was invented, various people have claimed to be on the brink of such a battery and it hasn’t happened. Why? Because even with new “breakthrough” technologies the energy density of these batteries is minuscule when compared to oil. And just as battery related technologies have been improving, so has the internal combustion engine. It’s unlikely that battery technology will leap frog the internal combustion engine during the next generation let alone anytime soon.

As for why sales are down, I think you touched on it here :

“Ultimately, the Prius is an exceptionally efficient and likable vehicle, especially for urban commuters – a group of drivers that represents far more than just 2-3 percent of American commuters”

While I would disagree with the likeableness of the car – it’s insanely tiny and looks like a possum and a dustbuster mated – there are a lot of people out their that are interested. The question is how interested are they in that sort of vehicle. The problem is that for the extra $$$$ up front, unless someone is putting on serious miles it’s not going to pay off. People are realizing that and with money not flowing as freely as it did during the Fannie-Freddie-Fed fueled housing boon, they’re just not willing to spend the extra $$$$$ just to be green.