hmm. this is interesting. Three reviews pointing at three different directions (video playback):
Eurodroid review says:
Someone also asked about the video formats and DivX/Xvid support. It successfully played this 624×342 resolution MPEG-4 XVID file. Here’s the Optimus One failing to play a 720×480 WMV file. A successful playback of a DivX file encoded at 352×256. That’s a pretty successful hit rate, as it’s pretty easy to live without WMVs.
Source: PHONE REVIEW: LG Optimus One, video, games and summary Eurodroid
Techradar says:
The video player is a bit more advanced, with LG adding in support for all popular online video formats. That said, we had a problem with a couple of standard definition Xvid encodes of TV shows which refused to play and popped up a "video resolution not supported" error. On the plus side, the phone easily handles WMV files and DivX content, so it's more than capable of functioning as a decent portable media player.
source: LG Optimus One review from TechRadar UK's expert reviews of Mobile phones
phonearena says:
Video playback supports Divx/Xvid codecs, which is a great feat, and those videos played nicely up to 420x260 pixels of resolution.
source: LG Optimus One Review - Camera and Multimedia - Phone Arena
So, I think it's better to wait for someone from TDF to get hold of the phone, do proper testing on how to encode videos for the phone and how to get the best resolution for videos.