With mplayer and extra codecs installed, i tried a little experiment:

WMV 720p - plays, sound is great, video is pretty slow
MOV 720p - nope
AVI 720p - plays first seconds, then stops
MP4 720p - plays, sound is great, video is pretty slow
MP4 1080p - plays first seconds, then stops
MKV 720x576, Dual Audio, 3 Subtitles - plays, sound is great, video is pretty slow

I think the N900 is capable of playing 720p videos or mkv videos without bigger problems, but the software for it needs to be tweaked (since it's not officialy supported yet).