Hey there. Just registered an account to post. I got involved in a similar "Cease and Desist" from Nintendo, regarding Pokenet, a Pokemon MMO.
Based on what little you've posted I can tell you two things:
"However, the use of Nintendo’s unpublished copyrighted materials or other proprietary information that Nintendo has not authorized for public release is not permitted,"
I think what they're trying to say there is that the copyrighted materials are unpublished (In the Americas).
"I’ve outlined Nintendo’s position and provided guidance as to what is, and is not, acceptable to Nintendo. Beyond that, I cannot provide you with legal advice."
He can, but he'd charge you for it. My legal advice? Move everything outside america. Get a Swiss registrar, a canadian server, a french proxy. America is person.
Edit:
Hah, We posted at the same time, Crimson Tide.
There's one other thing I'd be wary of. When we got C&D, I started studying the american term "fair use" and apparently, quantity is a big factor. Ripping every single sprite most probably does not count as Fair Use.