I've upgraded to the May 25 2005 CVS of XBMC 1.1 and although the picture is good, it still is "grainy" in comparison to XBMP...and to know I am not going crazy I put this on both my XBOXes, one connected via Madcatz s-video to a Toshiba 29" CRT TV, and the other connected via Madcatz Component to a Sony Wega 60" LCD...on both sets XBMP still looks "better".
And I am still looking into updating the xvid core, however I have run into problem procuring Visual Studio 7.0 (I have VS 6.0 and .NET 2003, its just 7.0 that I am missing, which is what XBMP was written in apparently).
Just checking but when you tested xbmc recently you DID make sure you used Hardware Overlays right?
This is what seems to have made the difference in picture quality. XBMP used overlays and XBMC never used to but it does now. But as long as you make sure that overlays is selcted in the settings you shuld in theory get the same quality as you do with xbmp.
Unless you know quite a bit about c++ your going to have a very hard time updating XBMP yourself.