It's too bad the DS with it's inferior graphics is stomping the PSP in terms of sales, isn't it? The PSP is graphically superior, but the DS is flying off the shelves at a much faster rate (especially in Europe and Japan). Not to mention the fact that nobody likes to buy UMD movies. Gameplay trounced graphics in the handheld market.
Sure, Nintendo took many risks in the past trying to be innovative (the Virtual Boy comes immediately to mind). However, the same innovative risks have kept the company afloat. Nintendo doesn't have to try and get involved in the graphics pissing match between Microsoft and Sony. They will find another way to corner their share of the market. If it's not your style, deal with it.
HD graphics may draw in the gamer crowd as well as some of the younger generation. But when a lot of inexperienced people try to play those same games, they get frustrated with the learning curve and control scheme. The Wii cuts out that frustration and thus tries to appeal to more people. You can parade about declaring your love for the graphical superiority of the original XBox, but that won't slow sales.