You video res, make sure you are not using generic settings. Check V & H rates etc. Make sure you are using the recommended res setting. Its the default optimal one. Remember that the quality of the image file, determines the quality of the thumbnail to a degree. Generating thumbnails also takes up a lot of ram, which affect the quality of the TN generated as well. Open kcontrol and check into all your video related settings. Enable anti-aliasing if you have the video ram. Some embedded viewers perform better with some combinations, so experiment.
Good luck
Kate