Wow! Sounds like this particular model has a lot of problems with this. I ordered the remote that I need, so I'll let you know how that goes sometime next week. If I decide it's worth it, I'll call LG and ask them to send a tech for a firmware upgrade to see if that sorts everything out. If not, we'll know for sure that it's a memory issue and not a firmware issue. I'm surprised that nobody with a US model has given that a try, yet.
EDIT: Whoops, I knew that AVI were MPEG-4. Silly mistake since I deal with them all the time. Sometimes I get forgetful. Anyway, I can't wait for the remote to arrive so I can play around with the video formats and see if there are other ways to make it all work. If it is not a firmware problem and it's an actual problem with less memory or something - maybe that was a side effect to us getting the nicer S-IPS panel than some of the other USA LG models got last year. Who knows?
I've got a nice program that can change just about any file type to an AVI, MP4, MPG, AVC, WMV, MOV, and so on... So I'll try some different ones and see. Have you tried any MP4, WMV (not sure if it supports that), or MOV? I know that MP4 and MOV are also MPEG-4 so I don't have my hopes up. I just want to know for sure if the issue is definitely with MPEG-4 (since that requires more decoding power than MPEG-2) or if it might be with particular containers like AVI or MKV. The issue is most likely with MPEG-4 but I will confirm just to be sure.
I will definitely test transcoding to MP4 using the H264 codec and the MPEG-4 codec. If we could play files with the H264 codec in MP4 format (since MKV didn't work, as you said), that would be ideal. The H264/AVC MP4's that I'm producing don't seem to show video on my PC so I guess they won't work on the TV (I think it's the fault of my encoding program, so I'll use another soon), but, I'll try anyway.
I'm not to optimistic about the above stuff (so if I've gotten any of that information wrong, forget about it), but, since you said that MPEG-2 MPG files work fine but the 16:9 ones that come from a DVD display in the wrong aspect ratio, let me ask you, have you tried any MPG files from your PC that were not ripped from a DVD? As in, have you encoded an AVI file to MPG and tried that? I ask because when you rip DVDs to VOB/MPG, it keeps the black bars on the top and bottom as part of the video so that MAY be the cause of the aspect ratio problem for your 16:9 MPG files. All of the files on my PC are without black bars (MPG included) so I will try playing one of those. When I've ripped my DVDs, I rip them to XviD AVI files so I crop the black bars out. I can then encode them to MPEG-2 MPG files and see if those play perfectly.Have you tried any WMV files?
Would you (and anyone else who wants to contribute) mind looking at the photo I attached and see if the memory amount matches up with your TV? I know we have the same model, but it would still be nice to confirm that we have the exact same memory - and it would also be nice to compare to the users who have no problems using all DivX HD files on their TV. To get there, click Menu on the remote, click options, then move it over to the left so that 'Options' is selected on the menu on the left - then press the 1 key until it gives you this menu (I think it's 7 times but I'm not sure).
Apparently, if you click the 1 key 7 times while keeping the initial Options menu highlighted (before clicking it), you get the option of updating the software once you have one plugged into the USB. Useful in the event that I do get the software updated and it makes things worse and I need to revert back to 4.30.01.
Someone needs to work on getting a login to this website: http://www.lgtechassist.com/kb/