A changing international scene did not help things. The Clinton administration was instrumental in forging the original settlement between Ethiopia and Eritrea. But by the time of the arbitration ruling, September 11 had already occurred and the Bush administration was focused on leveraging the support of Ethiopia on terrorism issues in the Horn of Africa. Accordingly, the United States was reluctant to press Ethiopia to abide by the ruling.
From an Eritrean perspective, you can see how this might be unsettling. Asmara had agreed to binding international arbitration, but the international community was apparently unwilling to enforce the ruling. Caught in the middle were a few thousand UN Peacekeepers along the border, acting as a buffer between the two armies.
As Eritrea's understandable frustration with the international community grew, Asmara began to lash out in patently unhelpful ways. It kicked out UN Peacekeepers by blocking their shipments of petrol and food; made threatening statements aganst top American officials; attacked neighboring Djibouti; and supported a faction opposed to the internationally-backed Transitional Federal Government of Somalia.
This latter issue is particularly troubling to the Obama administration. Indeed, just yesterday, Susan Rice raised the spectre of Security Council sanctions on Eritrea for their support of al Shabab, a Somali insurgent group the United States has labeled a terrorist organization. In her congressional hearing, Rice accused Asmara of "arming, supporting, and funding" the group. This is about as close to calling a country a state sponsor of terrorism as you can get.