1. Depends on what you get, there are lots of onboard video options now. But yes, there are plenty of onboard solutions that will be plenty powerful.
2. If you want to build this system cheap I'd go AMD, personally. I just built a Media PC that's been outstanding using AMD CPU/Chipset. AMD owns ATI so they can make motherboards with good onboard video a bit cheaper than Intel chipset based mobo's.
My media pc has a Gigabyte GA-MA78GM-S2H motherboard with an onboard ATI Radeon HD 3200 on it. I got it for $75 in May. The Radeon 3200 runs Vista Aero without a hitch and supports hardware acceleration for MPEG2 & h.264 HD content; and it's not even that bad for some 3D games if you go back a year or two. Not bad for $75.
That particular mobo comes with raid, HDMI, optical audio, NIC, and is a micro ATX board so you can probably find something nearly identical without some of the bells & whistles for even cheaper. The chipset is called AMD 780G, there are dozens of boards with it. There is a new model (790G?) but I have no experience with it.
I put an AMD 4850e CPU (2.5Ghz dual core) in it for $80 in May. The AMD "e" class CPUs make much less heat & take less power you can skimp on the power supply and it won't be noisy. Mine's almost completely silent. A 400W PSU would be plenty for this kind of machine.
HDs are CHEAP, highly recommend Samsung Spinpoint F1 drives, almost silent and great performance. $60 for a 500GB at mem express.
Toss some ram in there and get a case/PSU package and you're set. You can easily build this machine for under $400.
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