I have a PC set up as part of my living room alter to entertainment - Stereo / TV / Cable / short wave FM Broadcast unit. Bought a ATX desktop case, painted it Black to match my stereo, the whole works. Has 36 gigs of MP3 files playing back through Music Match jukebox.
I used to use a Voodoo 3000 AGP card, which worked fine. However I had problems playing DVD movies, so I ultimately switched to an ATI Rage AGP card. ATI is known for having good multi-media software, their DVD player worked flawlessly. No stutter playing movies on a PIII 533 (which I'm running at 333 right now for reasons I wont go into).
At the time I set this unit up ATI didn't have a working DVD player for XP, so I rolled back to Win 98. But they have since re-released their player for XP.
Both the Voodoo and the ATI support 640 x 480 or 800 x 600, but the later can be quite hard to read on a TV unless you enlarge your fonts. As I am sure you know TV displays are interlaced - only half the scan lines are drawn at one time, then the alternating lines are drawn. This means that under the best of conditions a computer display on a TV will seem "jittery". Fine for games, but not ideal for web suffering or document reading.
When I do upgrade to a HDTV I'll probably buy a dedicated DVD player with Progressive Scan, meanwhile this setup works pretty well.