Rainey, this computer / network can easily handle 3 concurrent 1080p transcoding tasks, or more. I have a 160 Gb Intel SSD320 and a 2 Tb WD Caviar Black 7200 rpm HDD. The Avatar video in question plays at 24 FPS. It plays absolutely smoothly for the first couple of minutes, then it starts skipping. It skips exactly at the same spot on TWO different devices - Toshiba Regza TV and Samsung Blueray player HTS.
I excluded all the obvious already.