VideoLan VLC Media Player. I recently tried to watch a .avi movie over 1GB, and the video was perfect, but I could only hear audio from the background. Movies below 1GB play just fine. So is there a limit of how big the movies can be? I have an iPod touch 3rd generation running iOS 5.0
Turn off the auto timzone detect and set your time zone to a city in Canada (that's in the same time zone as you). There are legal issues with one of the codecs in the USA. VLC checks for location by timezone setting to allow an easy workaround.
I would recommend converting the movie to a more iPod friendly format using HandBrake
It's free and neat.
http://www.mirovideoconverter.com/ is even simpler than handbrake. Drag - Drop - Choose Format - Sent to iTunes automagically.
iOS VLC has not been updated for over a year - expect these problems to get progressively worse.