#1. Most ugly people don't want to date someone else ugly. This is especially true for men, who typically care far more about their mate's appearance than their own.
#2. Most ugly people aren't conscious of their ugliness, or if they are, they at least aren't comfortable enough admitting it to sign up for this service.
2- I think we will see lots of decent looking people signing up because they think "in a pool of ugliness I will beauty queen", and that will help. For example in the latest members section, the girl on the top right is not ugly.
#2 People of all levels of attractiveness are able to measure other people's attractiveness on the same scale with relative accuracy.
Dan Ariely has a very good talk on this over at bigthink.com:
http://bigthink.com/ideas/20752
Given this, I think stratifying dating sites on attractiveness would actually improve successful match rates. Whether you can do this all in one site or need to create stronger logical boundaries is really a matter of implementation.
If people consistently rate your photos higher, after the ratings clear a certain threshold, the system considers you "attractive." The system sends you an email congratulating you and about how "you'll be shown more attractive matches from now on."