Video lags severely in VLC - 1080p .mkv?

I have a 2.4ghz iMac with 4GB of RAM and ATI Radeon HD 2600 256MB, running the current versions of 10.5.5 and VLC 0.9.5.

When watching the Earth 2007 video (x264 codec) it lags really bad. This seems rather absurd. Considering the specs. Is there any sort of solution for this, maybe a higher buffer via VLC (less latency/more latency?). Is this normal? I’ve never had any issues playing HD content.