The only thing holding Wii off of 1080i and 720p resolutions to me, seems to be a software choice not hardware limitation. I firmly believe Nintendo could do a 720p output as the original Xbox did as they hold roughly the same power but Wii is far more efficient. However rendering things in native 720p would be impractical. The environments would need to be fairly sparse for wii to render in true 720p or 1080i.
Pre-rendered cut scenes, menus, intros and other pre-rendered items could easily do it at current. Doing things on the games engine with real time rendering in 720p, it might be a bit tougher. Maybe if they added a chip to handle scaling in the Wii they could upscale it pretty easily. 480p isn't such a bad resolution to start stretching with a good scaling chip, but scaling it will never produce as good a result as native.
