nah they havent messed around with the graphics, its just there running things real time in this demo, with everything running, weather, physics, npc's, vehicles. not just the city and a few people in an enclosed area. This demo is a true reflection of what the game will look like.
The only think that is gonna worry me is going to be wether the frame rate drops when things get hetic.
It does look lush though, the water looks wikid.


YouTube - Grand Theft Auto IV - Trailer #3! - "Move up, Ladies"