1. I am using D2Plug in original form (as shipped). I only installed WiFi/BlueTooth package, SSH, and some other applications. Since I got D2Plug at the same time as www.plugcomputer.org/downloads/d2plug/
posted image files and source, I believe it's the same as built-in. I did not try to reinstall rootfs/kernel (waiting for something newer than 0.4 version)
2. It was old plain 640x480 DivX or XviD, MPEG4 Simple Profile. I performed side-by-side comparison between D2Plug and several others media players. I did not say playback was not smooth in time, it was blocky and coarse even for static frame. Since D2Plug's player have to upscale 640x480 to 1920x1080, it did it not good enough. I will try repeat this test on more video samples, but first impression was bad, and I lost an interest in using D2Plug as media player (in current state).
3. I put media files to USB drive. SD card class is important only for very high-bitrate video (>24Mbps), which is obviously not the case. Static picture view should not be affected by read/decoding speed.
4. Blocky means the block structure of DCT-encoded frame is visible (16x16 or 8x8 pixels). The edges of blocks are sharp and visible. It may happen during encoding (when target bitrate is too low), but in that case all players should display the same result (unless they perform extra de-blocking filtering, which is actually part of AVC, or MPEG4 High Profile, but definitely not DivX/XviD). Blocks also may appear when decoder's IDCT is not accurate. A lot of artifacts may appear when upscaling is using very simple filters. In case of original video 1920x1080 upscaling is not performed.
I am waiting for s/w update/upgrade, and will repeat my tests (will try to make snapshots).