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[MaxP]

what format is this 720p Troy file in ?

if its a divx then you may well find that your host PC (running the transcoding app) may well suffer.
256mb of ram is barley enuf to fart on a pc nowdays.
deffinatly not man enuf to open and read a file then transcode it on the fly and present it to the 360.

first things you might try is a different transcoding app for instance transcode or VLC360.
just incase either of these are less resource hungry than the one you are currently using.

but id ask again which format is the file in ?

another thing to try would be the app recently released that allows for automated convertion of dvix/xvid and other to a 360 compatable video file, this way you can convert the file and remove the load from the host pc as all it would be doing is feeding the data as opposed to transcoding it first.