Yes, Boxee can play illegally downloaded content, but this is not what it's being "geared" towards. If it were purely for downloaded content then you could use XBMC, Windows Media Center, MythTV, or any of the many media center software packages out there. Boxee is special in the fact that it has a much wider array of streamed content support (not just Hulu.) If you check out there website it says right on the front pageabout how it supports streaming video sites such as "Hulu, Netflix, ABC, CBS, Comedy Central, Last.fm, and flickr." This is in ADDITION to your downloaded content.
Now, I personally prefer my downloaded content as it's the exact quality I want and I don't have to tax my network while playing. Plus, I like having more control over my interface, so XBMC is my favorite, but Boxee is REALLY easy to use, and just simply plays a lot of content. At least try it before writing it off.