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First off, the Wii looks perfectly fine in 480p on an HDTV. I have a 44'' Samsung LEDTV, and there is no weird distortion or anything. Doesn't look as good as my PS3 or PC, but it doesn't look bad either.

Secondly, there is no reason not to release an HD Wii. By now, the graphics capability to display 1080p is much cheaper than when the Wii came out, which was cheap enough already. Nintendo just didn't see the point for the target audience.