I've bought many computers (for home, school and business) from Dell for ten years now. They work great, service is fast (though rarely required) and feature for feature they are the best deal out there.
Absolutely. And go even higher than that. XP won't thrive unless it has 1GB RAM. (Unless you're doing real simple stuff, which I'm not.) I've got a 160GB drive, and it's not enough. I've got a TV board ($99), and record movies and music to DVD's. Doing this is becoming common on PC's, so don't get left behind by buying a PC that can't handle this stuff.
Like others say, keep the old machine and put together a home network. I've got a P90 with W95 that I still use every day, along with the 2.4GHz XP machine.