XBMC4Xbox

I am using Rev 3.2 xbmc4xbox and have tried several skins and am unable to view the overlay for watched.

Most of my videos are on an SMB network share, however local video's are also affected.

Is there a limit to how many videos can be marked as watched?
Is there a way to clear this cache if there is?

Have you tried bringing up the context menu (white button is it) and choose Mark as watched / unwatched, see if it brings the change in the UI?

I believe that information is stored in the video database (Q:\UserData\MyVideos34.db). You could try bringing that on your PC, open it up in say SQLite Browser (http://sqlitebrowser.sourceforge.net/), and maybe run this SQL statement (SELECT c00, playcount, lastplayed FROM movieview), see what you get.