Hey Steve,
Your computer should be fine for running Cubase 5 at least. I initially ran mine on a similar system and had no problems whatsoever. You should be able to almost unlimited wav tracks (mostly HD stuff), and quite a few VSTi’s. If you are running into problems, you either have some super major gargantuan VSTi’s like EWQL stuff, or heavy drum stuff (BFD2, etc…).
It might only be that your system needs a little tweaking.
[edited for spalling… 
]
Seems to me a 2.5Ghz quad should be more than enough for what you described. I could run a project like what you described without too much trouble on my laptop 2.5Ghz dual core. Maybe it’s something else. Do you have enough memory? I had to turn on the 3gig switch when I went to Superior Drummer because the samples took up so much memory. But others know a lot more than I do and could help.
Is that a Q6600 you have Steve?
I upgraded my mobo and OS, so with Win7-64 and my now 6Gb of RAM, I seem to have more “room” for vsts before it chokes, though Win7 is a little bit more of a hog on resources. I am fairly sure that prior to my changing things, our systems were quite similar, I certainly find things are better since I changed over. Freezing tracks or bouncing instrument tracks to audio can help…I’ve never had issue with audio tracks, I can record 24 analog inputs simultaneously at 96/32 with no problems.
Does vst32 utilise the four cores efficiently?
I may be wrong but I seem to remember that vst32 uses one core for the audio engine and another core for the graphics. Maybe pull up Task Manager and see how the load is distributed across the cores whilst running a heavy project.
I’m not sure which machines started distributing multiple cores well, but I can at least say SX3 did a pretty good job of it. I was running a dual core system with a Delta 1010 at 128 (3ms Latency). I used a large amount of plugins, but not a lot of VSTi’s and it handled the distribution of power well.
3.25 Gigs with your current setup is pretty much in the standard range with 4 gigs Ram installed and no “switches”. My XP system currently recognizes 3.33 Gigs.
If I remember correctly, there was an issue with Cubase 5 using more resources if you created 1 instrument channel, and multiple midi tracks assigned to that instrument… than if you just created multiple instrument channels. Depending on your FX though, it’s pretty straight forward. Each effect = slight increase in CPU.
With your system though, you should be able to get over the century mark with audio tracks. No offense, it just sounds like your version of Cubase is getting a little long in the tooth, and is just not handling multi-processing the way it should.
If you never checked this out, take a look. Very informative.