First off, please read the following before disregarding the above poll as impossible. Nintendo's history does not necessarily indicate that they would go this route, but let's entertain this hypothetical for a moment.
The Wii is the first Nintendo system to be vastly underpowered compared to its competition, and there's a reason for that. Their funds were obviously spent on the R&D of the Wii-mote, not the console's tech.
Microsoft and Sony have both built their current systems to last a bit longer than the typical console lifecycle. They're both closely watching each other and each knows that the other is in no hurry to release a whole new system right now. Each have invested a lot of money and tech into machines that are still impressing us, and let's face it, both companies want to sell more than they have, if possible. Thing is, Nintendo is also well aware that they plan to stick it out a while longer...
Now let's consider the handheld market for a moment (different from the home console space, I know, but humor me). Nintendo released the GameBoy in 1989 and although it went through several iterations, there was no full hardware jump until the GameBoy Advance twelve years later. However in light of Sony threatening their portable domination, Nintendo unleashed their next generation hand-held, the DS, only three and a half years after the GBA; even though this meant a relatively short life for GBA even while its sales were good. Point being that Nintendo launched first when they were already on top, to secure their lead. Yes the Wii is doing just fine against the competition for now, but with the HD systems continuing to gain momentum and Wii already a success for Nintendo (they're best selling home console ever), might they be inclined to be the ones who, as with the DS, begin the next generation themselves? Remember that Nintendo is releasing new versions or Mario, Metroid and quite possibly Zelda all this year. That's a lot of trump cards being played real soon and all at once, don't you think? And remember that no Nintendo console has lasted more than five years before a successor's release, save for the NES, which was six.
We all know that Nintendo won't realese a new system based on graphics alone; they will have some new hook that justifies a new console. My question is, just how powerful will they go? They could probably launch next year and just largely match the current HD systems capabilities and still sell the system for $249, since it still probably wouldn't have DVD playback, much less Blu-ray. Or they could just make the current Wii HD capable, but personally I really hope they don't.
Just imagine if you will, if they launched in 2011 or early 2012, invested a bit in the tech of the system and unleased a console that's launch games looked head and shoulders better than the competition, much like Dreamcast looked better than PS1 and N64. Sounds absurd... at first. But when you consider that tech at this time would be even cheaper, they could still launch at around $299 and sell in droves. Problem is Nintendo would likely take a hit on each system sold, and we all know the big N wouldn't like that. However Xbox 360 proved that $399 isn't out of the question for then cutting-edge tech...
My guess for what will probably happen is just matching the competition in 2011 or early 2012; as that's all they'll need to do to sell huge and not spend a lot.
But here's one Nintendo fan that hopes they surprise us all and unleash a beast of a console- even without full 1080p or Blu-ray, with so much RAM, horsepower, and tweaked graphical architecture, it would far outshine even the PS3's best, even at launch. Combined with Nintendo's new ideas, third parties would likely flock to it and consumers would be rabbid over it, and especially if it launched in 2011, Microsoft and Sony wouldn't know what hit them. Yes, Nintendo would be starting from scratch, but 360 and PS3 are hardly dominant in sales even compared to Wii, much less what PS2 had accomplished. Nintendo may likely lose a little if it sold for the right price, but it would be a small price to pay in light of solidifying a dominant position in the market.