Well, if actual DVD playback is part of the problem (and please understand that I mean it's a cause [and I don't think it is], not just a symptom) then it's gotta be the codec. As Bitman pointed out, Media Player and WinDVD are just sharing a codec and they both have the same problem.
I'm gonna try out SP2 beta tonight. Wish me luck.
I guess it's worth mentioning at this point that I'm 99% confident that the problem is the video board. The system doesn't have onboard video so it's gonna be a bitch to confirm. Need to acquire another card, even if it's a cheapie.