OK. I did some testing tonight, which included installing XMBC on the system. The bright side is, XMBC works much better than the version of VLC player I was trying. The downside is that 1080p content is still a *little* tricky. The system seems to be able to handle all of my previous video clips (trailers) in 1080p without an issue. However, I also tried an MP4 bluray rip (lossless quality, and 5.1 audio) and fastforwarding would cause the audio and video to go out of sync for a while; it was clear the system was being taxed heavily. It also becomes difficult to do anything else while a 1080p video plays--even navigate the XMBC menu.
720p seems to go without a hitch at all. I hope that answers your question.