I noticed far fewer dropped frames with that (h264) video than when I tried an x264 mkv video, which is strange seeing as x264 is just an open-source version of h264 (IIRC). And I agree it's not worth going higher than 720p, not just because of performance issues, but because there's not a huge difference in quality between 720p and 1080p on the PB (even on the hi-res 1680x1050 display 😉).
Which codecs play the best in your experience? I haven't done much research/experimentation so I haven't found which play better yet.