Blame microsoft for the awful encoding. Considering how big the final file is I think they had it encoded at a low bitrate using whatever old codec they found (vivo maybe

), and then someone had the wonderful idea to reencode it at a higher bitrate or something like that.
Nah seriously, in terms of lighting/shadowing NG2 is *exactly* the same as NG1. They have better textures, better models, better animations (maybe), but the actual rendering of these elements seems to be done with the same engine as before just outputting more polys at a higher resolution.
Team Ninja was at the top of the graphics chain on the Xbox, definitely not so with the 360. And that's a real shame.