I think the limited interaction between Tony and the actual villains probably played a part in that; his meeting with Vanko in Monaco was excellent, but they really don't have any substantial scenes together after that.
Agreed, way to waste the fact that you have two of the most compelling actors at work today in the same movie.
Sam Rockwell's Justin Hammer is well-played, but he's a complete buffoon, not really meant to be taken seriously - I thought this version of Hammer was interesting. Usually "mirror" characters are people who are like the protagonist, but better; here we've got a guy who has clearly consciously tried to be Tony Stark, but can't quite pull it off.
The problem also was that we've already seen this sort of angle taken in Batman Forever (Edward Nygma's hero-worship of Bruce Wayne turning to enmity) and Spider-man 3 (between Peter/ Spidey and Eddir Brock/ Venom). Which added to my feeling that this movie was more like a second sequel, where they're beginning to run out of ideas.
I really like Rockwell as an actor but other than his little dance at the end where he came on stage (probably improvised), I didn't really care for his performance in IM2 one way or the other - he was just ... there.