Is this true?
I remember the game looking pretty good from the start..

This is not unexpected, and I (basically) was suggesting this as a possibility for the past couple of days ...

This is (effectively) a pre-Alpha development kit, and it would allow developers the opportunity to begin porting their games over to the system but would not be representitive of the final hardware. Since Nintendo probably won't have their CPU/GPU completed for many months they can't give developers the actual hardware that the system will run on; so the development kits would probably be using the unmodified version of the components that the CPU and GPU are based upon. Now, the completed components in the system system may have been designed to have a faster clockspeed than the unmodified components, or the unmodified components may run to hot for the form factor of the system, and the hardware in this development kit could be "underclocked" compared to the final system.

Why would Nintendo release hardware like this?

Because any program that runs on this hardware will also run on their final development kit, and if developers can still get a lot of work done while Nintendo completes hardware. Hypothetically speaking, developers could get games up and running with certain features turned off and begin playtesting and developing features that take advantage of the new controller months before they would be able to if they were forced to wait for more final hardware.

I don't know about Red Steel, but many/most developers were told to start development on Gamecube development kits because the (basic) hardware was essentially the same.

Exactly how i feel!! First year we'll probably see just ports of some PS3/360 games with enhanced controls (ala RE4 on Wii). but we wont truly see the WiiU's power until Nintendo show their games and 3rd parties actually do original titles on the WiiU

More or less I agree with you, but I would expect to see some visual improvements ...

Many/most games today have a PC version that has multiple different levels of details and today the lowest level of detail is in line with what the HD consoles can do. It is highly likely that many games will be released on the Wii U with a higher level of detail and some other technical features which make it look moderately better.

With that said, until games are designed specifically for the level of performance in the Wii U the improvements over the current HD consoles may not be obvious.

Honestly, I'm starting to get tired of all the rumors regarding WiiU's power. Some say it will be on par with PS360, others that it will be a small upgrade, then there are the ones that say that its' going to be a lot more powerful (as much as 4x or even more) only to find others that say that it can't be called next gen.

Until we can get some facts, not comments or thoughts, this will only encourage trolls to dismiss it or give Nintendo Fans hopes that may not be real.

So whatever, they are underpowered? Well, so what? It doesn't really mean much, only that these kits are not the final ones.

not to be a negative nelly but i find it strange that the system is about a year away and the devs dont even have a full dev kit yet

At E3 2005 (much like E3 2011 now), the dev kits for the PS3 and Wii were not final.  At E3 2004, the dev kits for the X360 were not final.

Fact is I cannot recall a single time at this point prior to a consoles launch that the dev kits were final.

^^^fair enough

Sweet lord....we'll I guess until the next E3 I wont believe a thing that is said about the Wii U