Realistically, they do have a chance in '08. See the democrats have proven over the past 10 years that they are very good at losing elections. They put up poor candidates who are basically unelectable and wonder what happened. Hillary Clinton will probably be another of those.
The only thing the democrats really have going for them at this point is the lack of a good candidate from the republicans. If the republicans can find a serious candidate and the democrats give the nomination to Hillary, then I think you'll see another republican President.
However, if the democrats could put up anyone with a political pulse and a knowledge of middle America, then they would probably beat whomever the republicans nominated. But democrats don't think they need the center (geographically) of the country. They think they can win with the coasts, which has been disproven in the last two Presidential elections. There may not be as many people living inland, but there are definitely the number of electoral votes.