My avatar file was on the SD but would not play after 2.2 update. I did create the "movie" folder, and have transferred the avatar in there via the phone interface, still would not play. Then I cleared the cache as described above, plugged the phone to PC via "mass storage" option, and moved the "movie" folder to the internal phone memory. Unplugged the phone.
Navigated to the movie (icon still did not work) via phone file browser - and now it worked. Then, plugged via USB again and moved the folder "movie" to external SD card. Unplugged - works great now, from external SD. It seems that the DRM has to re-register via the internal memory once it is cleared before you can move it to external SD card.
Also - I cannot find the option to bookmark the movie as described before here. If I hit settings button while paused, only "Bluetooth" option comes up.