Video encoding takes some processing power especially if you want to encode using the H.264 codec. DivX and XviD are less demanding than H.264 and they only use two CPU cores.
H.264 will utilize all available cores, but encodes slower, but is offset by the fact that all core are used. However, H.264 codec can be used to create videos that look as good as DivX and XviD (if not better) at lower bit rate. A quad core CPU is best for encoding with H.264.
For playback purposes I would simply get a HD 5570 which has true-bit audio via HDMI, meaning you can get DTS sound.
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I got a C2D E6600 in my HTPC, it was the CPU in my former primary PC. Do not dare to encode 1080p movies with it. Even my Q9450 is...