I have an SL-6000 and I believe the media player is the same. It will play only MPEG1 and MPEG2 video files plus MP3 audio files, forget MPEG4.
I recommend you download and install Kino2. You can find it in almost any Zaurus feed on internet, including the download section on this web site.
Version 0.3 should work very well with the 860. Kino2 is essentially a Graphical User Interface for mplayer, a very popular in the Linux world and powerful command-line media player .
I have to run mplayer from console in my SL-6000 to watch video full screen, but on your 860 Kino2 should make the whole process accessible from the GUI.
With Kino2 you can play MPEG4 video files. You'll just have to experiment with the frame rate when encoding to make sure it plays smoothly. If you have trouble just check the "drop frame" box in Kino2 preferences. Sort of "after the fact" solution but it works.
Have fun.