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"is that a THIRD PILLAR in your pocket or are you just happy to see me?"
LOL. Best. Third. Pillar. Joke. Ever.
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I honestly don't see nintendo leaving their Game Machine Only mentality.
I agree that Nintendo is a games-oriented company, but that spiel was just their answer/excuse for not having the entertainment capabilities of the xbox and ps2. With Nintendo giving in and making the gameboy player and the Q, I can see them giving in to other consumer demand. Not that I think they will, just that's it's not as unlikely as it used to be.
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Well, using my mad photoshop skillz and a little creativity, I have predicted EXACTLY what Nintendo's new console will look like... http://members.shaw.ca/lordmatrix/nds.jpg
LOL

Funniest "mock up" yet.
The specs given in the update would seem to suggest that it could play gba and and maybe gcn games... the media used (cartridges?) would indicate that maybe it won't store or play gcn games directly though.. maybe n64 games.. crappy ique... nevermind.
The problem with most of the ideas given so far is that, as has been pointed out, they can all be achieved through split screen. What is intriguing, though (at least to me), is whoever-it-was's idea of a touch screen and a transparent lcd. You could have, let's say, the lower lcd (the transparent touch screen) almost literally be the control panel of a space ship or tank or whatever.
Another possiblity is that the two screens on one system could be used sorta like the gcn and gba together in head-to-head games. One screen (the one powered by the more powerful processor--assuming that each has a dedicated processor, and not just for graphics) could be for the view that would normally be on the tv, and the other screen (and processor) could show and process your own secret stuff... This wouldn't really work on split-screened tv, but could be done through the existing systems, gcn and gba... but not many developers have.
It is sort of interesting that Nintendo will do things with their hardware to either encourage or force developers to do something more; remember how the n64 had loads of 4 player games because it had 4 built-in controller ports even though they could have easily made and sold an adapter, and how the gcn controller setup sorta forced developers to make controls more intuitive? ... Ok, the controller example isn't a strong one. But you get the jist..
I never doubt Nintendo's software, but hardware is a different story. And I'm not just refering to the Virtual Boy. Nintendo
does release hardware that doesn't necessarily open up new worlds of gaming possibilities. Think about it. They do it to make money. No other games company makes more money (or loses less) on their gaming hardware than Nintendo.