I had heard that the 4.0 codec results in a better quality than the normal 3.11 codec. I use the double pass encoding of the 4.0 codec and 3.11 supports only one pass. Nandub does allow multiple ...
What are you system specs? You mean terrible as in pixelated? Because I'm having that problem. If they're divx avi's, the 3.11 alpha codec should be all you need (unless it's one of those new 4.0 ...