I wonder how much internal memory the DS2 will have and how big a place Digital distribution will be. Personally I think about 1-2GB if they treat DD like they have with the Wii/DSi (small DD only games + downloadable classic games) or 8GB+ if they offer full games for download (they won't go DD only) I think the second option would be the best.

Nintendo has an outstanding relationship with their retailers. No way are they going to burn that bridge like Sony did with the PSP by going digital only. They'll use cheaper, bigger cartridges and boost the DSiShop.

No. It failed for Sony, and cartridges have been working fine for Nintendo. Besides, they have a much, much larger capacity now at affordable prices, compared to the past. Also, cartridges are infinitely more user-friendly than discs, especially for kids and the elderly, and those are a big part of Nintendo's demography.