One for Intel people, I've fixed this now. Your installation program has a flaw, the clue was found in the log:
Looking for MediaSDK configuration C:\Driver_W64\VGA\MediaSDK\IVB\config.ini
* config.ini not found
When I checked this location, the config.ini and files are at C:\Driver_W64\Graphics\MediaSDK\IVB\config.ini and so not in the VGA folder where the setup script is trying to look for it. So I un-installed the graphics drivers, then moved the MediaSDK folder into the VGA folder where the script is looking for it, re-installed the graphics drivers by running the Setup.exe in the C:\Driver_W64 folder, so now the config.ini file is found and the MediaSDK components are correctly installed, and I now have Hardware encoding!
The setup file came from this location: http://downloadcenter.intel.com/Detail_Desc.aspx?agr=Y&ProdId=3441&DwnldID=21135&ProductFamily=Desktop+Boards&ProductLine=Intel%C2%AE+7+Series+Chipset+Boards&ProductProduct=Intel%C2%AE+Desktop+Board+DZ77BH-55Keng
This must affect everyone installing this driver.