The Wii is capable of outputting 1080i and 720p but it will depend on a firmware update and if developers utilize it. The only reason why Nintendo is limiting the Wii to 480p is so the games made for it will look and play better. For example, if Zelda was made to run at 720p it would mean that more system memory and system resources would be dedicated to out putting 720p which means lower performance. There for a performance increase and acceptable/good looking graphics could be achieve with 480p. Another example would be computer video cards (which is the same with the consoles) like the Geforce 5000 series. They had Directx 9 support but with it on games would pretty much slow down to an unplayable state. So users just drop the resolution or directx 9 to gain playable framerates.
With those notes, I still believe that Wii is powerful enough to at least run 1080i with better texture, lighting, and polygon count then the original Xbox. I just believe Nintendo is trying to play it safe and they purposely underestimate their own system. Look at the Gamecube, Nintendo play it safe with all their 1st party games while 3rd party pushed it to the limits like Resident Evil 4 or Star Fox Adventure.
The specs of the Wii so far indicates that it can do much more then what most people think. Do remember that the Xbox was slightly stronger the Gamecube while the Wii is a lot stronger. Most importantly it has why much more memory.
Hope I make sense, it's late here in San Diego, CA.