After extensive testing I can report the following.:

1. All files with vp6 video streams (typically .flv’s from YouTube) up to 640×480 play. The former blocky artifacts problem has been fixed in 1.0.4.

2. Files with AVC/H.264 video streams (typically .mp4, .mkv or .flv’s from YouTube or other sites) with resolutions up to 704×480 usually play correctly. Some at 640-720 will not and they and those from 720 but less than 1280 will start with a quickly frozen screen and WiiRemote, but then may start to play 1/3 to 2/3 of the way through and if left to play to the end will terminate and return to the video menu. Those of 1280×720 to 1920×1080 resolution will cause WIIMC to dump and restart. This is because the WII does not have enough power to decode these videos.
You can avoid this problem by using the VLC Trancoding Solution http://www.wiimc.org/forum/viewtopic.php?f=4&t=405 , and transcode these videos on the fly while streaming them from a more powerful PC.

3. Files with MPEG-4 Simple video streams (typically XVID/DIVX .avi’s) with resolutions up to 1280×720 have been reported as playing correctly.

4. Files with MPEG-2 PS video streams (typically DVD rips and TV-DVR recorded .mpg’s) with resolutions up to 720×480 play correctly.

5. Files with MPEG-2 TS video streams (typically HDTV recorded .ts files) with resolutions up to 1280×720 play correctly. Those of 1920×1080 resolution will cause WIIMC to dump and restart.

6. AAC, AC3 and VORBIS Audio Streams all play correctly.

Hope this is helpful to others. You can use “MediaInfo” http://mediainfo.sourceforge.net/en/Download to determine the attributes of your A/V files.