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Yes, it plays video, you just need to convert it to DPG or DSM format, which are DS homebrew specific formats. A 1GB microSD will fit somewhere around 6-10 hours of high quality video.
The worst problem with the video quality is the limited colors, it's obviously 16 bit, but most of the time you probably wouldn't notice it. The frame rate and sound quality are superb, and the compression has no noticeable reduction in quality when using the optimum settings for conversion. I've watched somewhere around a hundred video podcasts and a number of full-length movies on my DS and never had a problem with the quality, although the low resolution could sometimes be a problem when there's small text.
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