The only real option for playing full screen high quality video is to convert it to mp4. There are plenty of tutorials on how to convert AVI to mp4 for 3.03 OE-C on here.
Your game saves will be fine. The new firmware won't affect anything to do with your emulator.
There is a MAME emulator called MAM4ALL (v0.0.3):
http://dl.qj.net/MAME4ALL-v0.0.3-for...8416/catid/124
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