Episode 3 and 4 are up now too.
EP3:
http://www.youtube.com/watch?v=wbkJYzD7Yxc
EP4:
http://www.youtube.com/watch?v=eIh_dMjmJI0WIhg
So it seems to me that opinions are actually pretty divided. Some people only like things made in flash (and yes since it's an actual animating tool a person can get really good with it) and other things made by a team of people who are trying to go professional and focus more on shorts and such to improve their skills build up a portfolio and get a job in the industry.
I think it's a lot harder for high schoolers and others who discover anime, have some ideas, and want to make their own with very little know-how or tools. Most fanime is made in MS paint and uses Windows Movie Maker, and I think there is a limit on how short the images can be (I don't think it goes as low as .1 seconds for example).
It seems the popular fanime tend to be pariodies, or that the 'good' ones that people really like tend to be made by a team of people with some skills and necessary tools (Gainax when they were just entering contests at conventions, Maikaze which is a studio, etc). So I guess the important thing isn't so much the medium but whether the story presented can carry it, although mediocre tools and art can certaintly drag down an otherwise wonderful story.
I think the reason that VampireMew and NyanNyan and JungleBook and the others are so well-liked despite having little artistic skill is primarily due to the fact that they are very well done as parodies. However with a certain level of effort maybe it'd be possible for someone to do a serious story using these methods too.
I don't know, I can't say for sure, I'd really like to know what other people think of this though. Again if anyone has any thoughts at all on the topic of fanime (fanmade anime) please let me know!
Thanks!