A suitable video card will be less than U$100-. Probably well less. Don't have to spend a lot, just get a card with a reasonably fast GPU, 256+ Mb of on-board memory, and a DVI and/or HDMI port.
Even if that hand-me-down Dell system 'only' has an AGP slot just about any AGP card you can find will be better than the on-board video. On-board video isn't automatically bad, but in the case of the Dell SFF boxes it's designed for low-cost use in a business environment, not as a media-capable PC.
Hmmm.... I strongly disagree. An old P4 2.8 GHz is going to seriously drop frames with 1080p H264 compressed footage, unless you invest in a good video card that can handle the H264 compression. VC1 and MPEG-2 compression are far less demanding, and the P4 should be able to handle those just fine.
However, even my dual-core Opteron 170 @ 2.6Ghz drops a frame here and there on 1080p H264 video, unless I enable the hardware acceleration on my X1900XT card. From the testing I've seen, the same is true of many of the lower-end
current Core2 CPUs out there, much less the old Netburst CPUs.
Probably your best bet will be to wait until the HD 3850 AGP cards become available (Sapphire and PowerColor will release them, probably early next year if not this month) and go with one of those. That should run around $200-$220 (the PCIe versions are about $179). There also are AGP X1950 Pro cards currently available, which include less-robust H264 acceleration if you need it now, but the acceleration in the 3850 is much better and I'd wait for it (the acceleration on the older card might not handle all content on that slower CPU). I don't know if there are any HD 2600 cards available for AGP computers. If so, I'd stick with a Sapphire brand card, as the HIS and PowerColor ones have some well-documented driver issues.
If you love Nvidia instead, then the 8x00 line of cards also includes hardware acceleration for H264 compressed video. Their hardware isn't quite as advanced (video decoding wise -- it is better for 3D applications), and they only accelerate H264, leaving off many of the features for VC1 encoded video. As I said before though, VC1 is far less demanding and the CPU can probably handle it alone. The big issue with Nvidia is the quality of their Vista drivers. If you go Nvidia, I'd leave Vista alone for now. They are slowly fixing their 3D issues with their Vista drivers, but their video-quality still has a LONG way to go.
Here's a good article from this past summer:
http://www.anandtech.com/video/showdoc.aspx?i=3047 It doesn't include the HD 3850 cards (which weren't out then), but they have effectively the same video decode hardware as the HD 2600XT listed in that article, without the accompanying pitfalls.
I agree with newsposter generally on his Vista comments. I'd probably stick to XP for HTPC uses for now, mostly due to driver quality issues.