I've got a pretty recent dual core machine, but despite that, a high quality 1080p mkv file will bring it to it's knees, showing up as the frame rate dropping to a snails pace, or large blocks of frames being skipped when Sync Playback to Display is enabled.

While poking around in the Video settings on XBMC I happened upon an option to enable VDPAU. This feature basically off-loads video decoding to the video card, and I have to say, it works wonders. Turning it on reduced my CPU from 100% and poor performance, to less than 10% and a rock solid frame rate. It's controlled by the "Render Method" option in Settings->Videos->Player. It's only supported on certain 8xxx series cards or better. You can find the complete list here

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