You have to remember, that these files are already hosted online. Hulu is a web based service. So yeah the quality isnt going to be DVD or BluRay. You are talking about videos that are lower quality so that they dont take up a ton of server space and bandwidth to view them. Think about it. If you had all of these files in great quality you would be running upwards of 2GB or more per video. Not to mention the amount of bandwidth needed to get each person that video.
It is true that the format is recompressed. I can say that even with my "N" router that most shows are not that great quality. What i did was find some scripts for shows directly from the Networks like CBS and NBC. They are a bit better quality than the ones on hulu for some shows.
But overall the thing is, they are hosted online for viewing in Flash. Which we all know to be nothing but trouble at the best of times. The quality might not be up to par, but still it doesnt lessen the experience. I have watched a lot of stuff via PlayOn and have yet to be disappointed by the amount of selection that it can offer via addons and scripts.