I don't really use divx cuz it's so laggy at rewinding because of the actually half intelligent way they encode it. Same with Xvid except it's not intelligent at all and takes FOREVER to skip around in a video file.
As for the encoding options in WMM2, they do a really good job of hiding the options

After importing the movie, with the split into scenes or whatever checkbox unchecked, drag it onto the timeline and go to save movie file and press next until U see the screen that says "Best quality playback for my computer" Click the show more choices hyperlink under it and tada

The best one I've found is the variable bitrate because when a whole bunch of stuff is moving it just raises the bitrate instead of making it all go to crap and it saves on space by lowering the quality on non-moving objects in a video

That option is called "High quality video (NTSC)" and should be third from the bottom.
<<banned from SRF for disrespect of the mod team and rules violations. -SG>>