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CS3 Performance Issues - Productivity Crippled - S.O.S.

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I was having performance issues and repeated crashes with AE CS3 on Win XP, so I talked my boss into upgrading me to CS5 and Win 7.  All was well until we hired a new guy to help me with my video work load.  He has inherited my old software and there's no money for another upgrade, so we're going to have to figure this out.
He running CS3 Master Collection on a Dell PC running Windows XP (Intel Core II Duo 2.33Ghz, 3.25GB RAM).  The graphics card is the ATI Radeon HD 2400 Pro, which came stock with the machine.  Specs on that card here: http://reviews.cnet.com/graphics-cards/ati-radeon-hd-2400/4507-8902_7-32763888.html?tag=sp ecs.  Pretty wimpy, I know.
Anyway, my new coworker has been experiencing at least as much frustration as I was, with frequent crashes, a fickle RAM Preview and bad renders.  His machine has more RAM and a faster processor than I had when I ran CS3, but his performance seems even worse  Since CS3 won't handle AVCHD files, I've been converting our HD camera footage into 720p MPG 2 (Adobe Media Encoder) for projects he's assigned.  I suppose that could have something to do with it, but I can't see why CS3 wouldn't run an MPG generated from CS5.  Anyway, I asked him to write up a short list of the problems he's experiencing and he gave me this ...
- rendered movies are often corrupted with red frames that flash in spots
- when i try to render an MPEG2 at full res it will give me an error message that says:
After Effects: AEGP Plugin Media IO Plugin:
There is a mismatch between Output Module settings and Transcode Settings. Please verify your settings and try again.
Property Data Invalid!
MediaIO2 error: 0x400e0004
Frame dimensions out of bounds
(5027 :: 12)
- when i try to render a RAM preview, often it does not render the complete work area. it takes several attempts to preview the entire selection
- occasionally, when i bring in new media it gives a message saying 'media pending' and i will have to shut the program down and re-import the media
- it will often (1-3 times per hour) crash unexpectedly and give a message saying 'After Effects has crashed'
- when i try to render a RAM preview an error message pops up saying it needs at least 2 frames to render when i clearly have more than that selected
It's my hope that someone here will recognize a common thread between these various issues and be able to suggest a silver bullet that will fix it all.  I realize that's not likely.  Research to date has yielded glimpses of possible solutions involving cache and scratch discs, but there are few specifics and I'm not sure exactly what adjustments to make.  I also have a spare Nvidia GForce 6800 graphics card form my own computer at home that I could donate to this office if it would help.
I'm about to pass these issues on to our Help Desk and let them deal with it, but I'd love to be able to at least point them in the right direction, since they mostly deal with standard office software and won't have much experience troubleshooting multimedia applications.  I believe they also have the option to call Adobe for tech support over the phone, but I'd like them to have a clue if they do.  Can anyone suggest what settings, drivers or hardware might be a good place to start to get my man's system running a little more smoothly?  I'd really appreciate some insight before we start poking around blindly and I offer my thanks in advance for any forthcoming wisdom.
Thanks!
P.S. For what it's worth, my copy of CS5 is running like a champ on Windows 7 with the 64 bit OS.  My machine has an ATI Radeon HD 2400 XT for a card, which can't be much better than the "Pro" version in my coworkwers machine, right?
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The best answer: No legal issues, both my CS5 and his CS3 are bought and paid for.  However, if After Effects CS3 is incapable of rendering a decent looking file compressed to a reasonable file size, then I'm not sure how valuable it is to us anyway.  It seems unbelievable to me that one of the most popular industry standard video aps isn't designed to render anything more than draft quality files for client review.  Even if he renders an uncompressed file from AE, CS3 didn't ship with Adobe Media Encoder as a separate ap, so what can he do with it without resorting to third party software?  I don't get it, but I'm clearly no expert on the subject.
So, things being what they are, what file format would you suggest I convert the AVCHD file to in order for my CS3 burdened coworkwer to be able to work with them?  We are a Windows shop, so I don't know if Dave's Quicktime/PNG suggestion will work for us or not.  You've always given good advice to me in the past, so if you have an alternate suggestion I'm eager to try it out.  Just go easy on me with the jargon because I'm primarily a print designer and my video skills at this point are (obviously) intermediate at best!
In any case, I really appreciate both you and Dave taking the time to respond to my post.  This forum continues to be the best resource I have for solving problems and augmenting my understanding of these programs.  My thanks!