It's graphics are on par w/ those of the 360. Not next gen at all. That demo was lacking compared to some modern PC games, which is pretty unforgivable for a tech demo (unless you're comparing across two different hardware classes like mobile vs console). That demo was severely lacking in dynamic object reflection on the water, water geometry variance (if there was even water geometry, I don't recall seeing evidence there was), sophisticated particle control. And while a lack of something doesn't mean the console can't do it well with all the other stuff, the following were not present in that demo: Multiple lighting systems, advanced lighting environments, ambient occlusion, any form of realistic shadows, geometric tessellation, potentially motion blur (i can't tell)
It did demo depth of field and and what looked like subsurface scattering, though.
My thoughts on the WiiU:
The Wii U looks like it should've been nintendo's console 4 years ago. That being said, since the 360 and PS3 are here to stay for a while, this is nintendos chance to actually compete in that market again. I'm always skeptical when it comes to proprietary designs such as this controller: any game that makes good use of it, will likely be much worse on any other console (one nice thing about the standardization of the other 3 major gaming platforms), thus making games exclusive to that console. While historically this has also worked the other way (games that are made for 360/PS3/PC are frequently not made for Wii), there is a good possiblity that this is more because the Wii just has terrible processing/graphical power, a lack of HD resolutions, and a severe lack of storage capacity. The WiiU looks like it may overcome all of these, providing all those expected standards that may allow more games to come to that console's owners than before.
Which brings me to my next point: The Wii's biggest problem was that Nintendo focused so much on innovating new stuff for it that they completely left out current stuff for it, and it suffers quite a bit because of that. A lack of HD resolutions, severe restrictions on game size and permanent storage, virtually no processing power needed by many new games, a horrible network policy and implementation, virtually no support for the console as a home media center device (only supporting SD netflix and whatever SD stuff you can find on the web, i.e. youtube, but in a browser, no support for it as a network media player or even as a dvd player). As such, the wii was an extremely limited console barely even able to call itself a part of that generation of consoles, yet sporting what appears to be the future of gaming consoles. The WiiU at least how Nintendo was pushing it at E3 seems to be addressing virtually all of these issues, adding in all the standards we expect of a current gen console. It will support HD resolutions (very important for games that would like to have a detailed UI or have lots of text), it will have games on High Density disks, allowing more standard size games to be shipped, much more storage on console for things like DLC, game patches, (maybe accelerated loading times?), processing and graphical power that should go about even with the 360 (have yet to see how much graphical muscle will be lost by powering the controller screens) allowing for the realism that makes some games and the AI or animations for others. Nintendo and EA's reps seem to be implying that they are reworking the network policy for the WiiU that may make the online community more open and have better performance with more user-driven features. The only expected standard not addressed is it's use as a media center device. Hopefully it will be able to at least play DVDs and act as a network media player (two things the other 3 platforms can do), if it can play Blu Rays, then that would actually put it above the 360 in that regard and be even with the PS3.
As far as the controller is concerned, to me that looks like a PITA to hold for long gaming sessions, but I don't know for sure yet. I also have no experience with analog circle pads. However, I think there are some pretty good things that can be done with that touchscreen. I could think of 3 really good uses during their demo and they gave a 4th before I came up with it. 1) the screens can be used to keep information for each player secret, allowing each user to make decisions based on only what they know. Historically pvp imperfect information games required networked play with each player at their own station w/ screen, however, this new controller allows that to all be done in person. The sort of things I mean are like, for example, a card game where you can see your hand, or a turn based strategy game where each player must input their moves secretly before the turn is executed. 2) Any time any sort of popup interface would occur in a game that takes the player out of the mode of normal gameplay, it could probably easily be moved to the controller screen to improve gameplay. This includes everything from real-time menus (such as in mutiplayer games like changing options in Halo; or in MMOs) to minigames, such as hacking vending machines in Bioshock or some sort of auxiliary control pad based on your environment (i.e. if you had to enter some numbers on a keypad to unlock a door) 3) Unique input opportunities, such as showing your inventory, offering context dependent actions that the player could take, or offering some sort of visual interface for control (such as showing your team on a top-down area map and selecting an area for your team members to go to, all w/o breaking the gameplay on the main screen (via menus, changing button actions, etc). 4) This one Nintendo was able to come up with but I didn't think of it: Asymmetric gaming (all players are not of the same user category), which would allow players to basically almost be playing different games that are part of the same game (such as one commander and 3 subordinates). I feel this controller has much more practical application to directly improving gameplay than the Wii's new controller.
All in all, if priced similarly to a 360, I think the WiiU will make a very legitimate competitor to the 3 current high end platforms (360, PS3, PC) if Nintendo does deliver the way I've interpreted their press release to mean things.