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Matt-
For just DVD playback and no PVR duties, a Radeon 7500 is all you really need. You can go higher than that if you like (8500, 9000), but if it is only for DVD playback, the 7500 is just fine. The difference in an AIW is that it has audio/video inputs that are used for PVR (Tivo) and other capture purposes. For strictly DVD output, just get a regular Radeon. I assume you are not playing many games on this system either, right?
If you want to get something fairly new (for a little light gaming), I suggest the Sapphire Radeon 9000, great card for little $$$. Take a peek on Pricewatch, should be <$100 everywhere right now.
Soundcard, I don't know. I think if you give an HK525 a 5.1 signal and put it in their proprietary sound mode (forget the name), it should up convert the signal to 7.1 sound. Really this is fine as how many games you figure are actually programmed to deliver true 7.1 sound (I'm guessing none)? So you can let your HK convert it to 7.1, or let your sound card convert a 5.1 game to 7.1, same end result. And since you already paid for the HK, I'd just depend on it.
HTPCs involve a lot of opinion, so whatever you decide -- enjoy...
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