Red Steel 2 is reported to be in the works right now according to French Wii gaming news site, Live Wii.
According to some quick translation by members of destructoid.com. Ubisoft is apparently attempting to fix the biggest gripe that gamers had about the first Red Steel – the awful sword fighting interface.
Gamers would swing wildly with their Wiimotes while their onscreen counterparts would respond a full second or so later after the initial movements. Can you say, "die fast?" E3 participants, who saw the game demo last year, complained of the faulty interface. Ubisoft officials stated that the problem would be fixed by launch time. It wasn’t.
Upon the leaked news that Red Steel 2 was in development, Ubisoft denied that this was true and stated that there was no official word about the sequel.
So in other words, yes, they probably are.