It can, but make sure you have all of the software updates installed. It will run hot and begin to stutter over time if you play videos for a long period of time. It also get's really hot if you connect it to an external display but is capable of doing it. I have the same model you are talking about and have been using it since March, so I feel safe in giving you my opinion on it. The early 08 model Air is not a good laptop for video imo.
Now the late 08 Air I upgraded to could almost be a desktop replacement. It is the machine the first Air should have been.