FFmpeg and MEncoder are both good quality FOSS encoders.
If you've got problems with the encoding (re: your bug) at might be worth having a look at their configuration, perhaps even the output codec and working it through that way. It might help if you have a local mirror of your remote system so you can test various configurations quicker than if you were running it on the remote server.
I would be quite surprised if Panda weren't using a tool like mencoder or ffmpeg to do their encodes.
The obvious advantage of a third service (especially for something like video encoding) is it takes a whole load of the heat off your server. Encoding video is a seriously heavy task.
That said, with the prices Panda charge, you could easily build a little render farm using a couple of VPS machines
Edit: Panda even post their ffmpeg config so it might be an idea to just nab one of theirs.