Firstly, the picture quality in less than perfect light of the TZ20 is pretty poor. I bought one and sent it back within days, was VERY disappointed with it compared to my old TZ7!

Instead I bought the older TZ10 which has the same sensor as my old TZ7 and takes MUCH better photos than the TZ20.

Not sure about XP, I've got Windows 7 and that recognises and plays the AVCHD videos, that's the setting I always use.

I actually know someone (on a forum, trustworthy) who's selling a TZ10 (they're becoming scarce and increasing in price brand new) with a 16GB card and a case for £160, very good price, he's not had it very long at all.

http://www.avforums.com/forums/digital-camera-camcorder-classifieds/1545535-sale-panasonic-dmc-tz10-digital-camera-black-16gb-memory-card-case.html