I'm not able to reproduce your problem as Timthumb is generating the thumbnails with good quality over here. It could be something related with your PHP settings that's messing with Timthumb, but I can't tell for sure.
You might wanna give this a try:
# open wordpress-popular-posts.php using a text editor such as Dreamweaver or Notepad.
# Find every occurrence of this:
# ... and change it to:
That will force Timthumb to create thumbnails of 100 quality. Default is 75, so you might wanna play with the value a bit.
Note that this is a temporary fix. I'm looking forward to remove Timthumb from my plugin and have WPP create all thumbnails natively, so anyone reading this in the future might find that this solution is no longer valid.