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Just got my r101 delivered from Woot. I've put movies on the internal 4gb and they play just fine. I've loaded some on various 16gb external sdhc cards and this is what you have to do: external is for STORAGE and not playing from directly, just copy/paste them to the internal 4gb when you want to watch a movie. It's a pain imho but that's how this thing is.
My r101 is NOT rooted and I use whatever player it came with.
I use DVDFab to rip/convert all my movies to mpeg4's. I use the built in ipod presets since up until now I've used my iphone for my mobile movie watching. With either the built in presets for ipod or iphone(not iphone4) the Cruz r101 plays them just fine, no problems with video or audio.