It needs to be an MP4 format. Try using Act 1 Video Player from the market. Costs a bit, but well worth it. Come with a matching program for your computer. Put a movie DVD in and the Act 1 program will translate it into an MP4, complete with great sound. Drag, drop the MP4 onto your SD card's video folder (in Media, I think) while in USB mode.
Note: Each movie is about 1 gig, so I don't carry around a lot on my card. I just put them on or take them off (drag/drop method) whenever I know I'll be watching them. But the quality and sound are incredible!!!