Here's a photo I took of the phone while playing an .avi file (XVID, 624x352 pixels, 23 fps, 1186kbps) in Meridian Player.
I couldn't find a screen capture app for Android, but I think the photo is clear enough to see the obvious color banding on the wall. It's the same thing with the YouTube app.
Any ideas why this happens?
P.S. My phone info:
The phone is not network locked and the software, apart from the unofficial XXJD4 firmware, is completely unmodified.