Here is XBMC running the the video Big Buck Bunny, a 1080p movie encoded using the H.264 codec and with 5.1 channels of audio.
Video playback was smooth thanks to the help from the GPU, which accelerates the playback of video encoded using H.264. The Pi's VideoCore IV GPU is capable of Blu-ray quality playback using H.264 at 40Mbps.
XBMC playback via HDMI was fine but I had an issue using composite, which hopefully will be fixed by a tweak or a different build of XBMC.
Nick Heath is chief reporter for TechRepublic. He writes about the technology that IT decision makers need to know about, and the latest happenings in the European tech scene.