Yeah, it's just a rumour started when a bunch of ppl clung to hope when they saw the PS3 tech demo of the FF7 intro.
And it doesn't look uglier at all, FFnut. I saw a video sequence where someone had put the original intro and the new intro side by side, so that you could watch them play at the same time and compare. The difference is huge in the peoples' looks and movements. If you think the people walking around, Aeris and Cloud looks better in the original FF7 intro, then you must have hit your head pretty hard IMO. And everything is generated in real-time, unlike the original FF7 intro which was a pre-rendered FMV sequence.. Sure, it definitely could have been prettier considering the power of the PS3, but I still thought it look pretty good.