Have you enabled hardware "decoding" (can't remember exact word) in PowerDVD ?
What processor are you using ?
Beyond that I'm a bit lost. I'm using a non-ATI 7500 under Windows ME. I suspect you are using your 8500 under WindowsXP and this opens a bit of a can of worms regarding driver versions/PowerDVD versions.
Having said that, even on my setup I've never got silky smooth pans but I've put that down to the 24fps film source.