If you want a virtual machine, get VirtualBox, not Virtual PC. At least then you may have some chance of getting that old-but-3D game running with hardware acceleration.
Possibly VMWare Workstation if you want to pay for the extra nifty features it's got (snapshots are nice).

Its a Studio XPS without monitor (I already have a 22-inch widescreen that's only a couple months old). I can't really post a direct link because this is through the Dell Employee Purchase Program.

I was gonna paint flames on the sides, too; that always makes things go faster!

Really, I would advice to install a separate virtualization software like you said.
I was talking about that new built-in win xp mode, if he prefers only.

That's what I am unsure of. I don't think it would be cheaper, just the processor and graphics card alone would be close to $600, add in the cost of case, RAM, mobo, and OS, I think I'd end up at least at, if not over the price I'm getting.. At full price, this machine would be almost $1300 and I'm getting a $340 discount on it. Granted, full price from an OEM does not equal full price for a do-it-yourself.
Its a Dell, they make their own mainboards based on Intel mainboards. Every one I've dealt with in the past has been rock-solid reliable, so I'm not terribly worried about it.

The new built-in virtual machine only lets you run applications that don't require graphics hardware acceleration... in other words, no games, which is the only thing I might use a virtual machine for.

That is what I hope to be able to do. I planned my last PC to last 3-5 years and I managed to stretch it to almost 8 years now with hardware upgrades. Unfortunately, it has reached a point in life where there is nothing left to upgrade. It's still a good machine and I'll probably just end up putting it out to pasture as a HTPC.

The X-Fi XtremeAudio is a fake. Get rid of it. If you want a sound card, get something like the X-Fi Prelude, Forte, or HomeTheater HD. Expensive, but they'd probably do your speakers some justice.
But, because you're on a tight budget, just do with onboard for now. In my loose experiences, I don't notice too much of a difference between my X-Fi Prelude (which sapped a good US$190 out of a US$1450 budget two years ago) and my onboard Realtek ALC998A codec, but note that I don't have speakers or headphones actually worth anything. If it's a problem, you can always add it later.
One piece of advice on the graphics card, though-wait for NVIDIA's counterattack with Fermi/GT300. It'll be yet another choice to consider, and it should drive down the prices of existing cards.

What do you mean by "fake"? If you are saying that it is a software-based sound card like my current Audigy LS, that is not true. They offer a software-based card as an option on this system, the Soundblaster X-Fi MB. The X-Fi Extreme is the full hardware card that is the next step up from that.
To be honest, My speakers aren't great, its just a Logitech 5.1 system and is a few years old now. The problem I've had in the past is there is a significantly noticeable sound quality difference when switching from a sound card to on-board. Bear in mind that the last new PC I bought/built was almost 8 years ago, so on board sound could easily have changed a lot since then.
Problem is, this machine is a limited time/limited hardware deal. If I'm going to get it, I only have until December 1st. After December 1st, I lose the $340 discount and within that time my only video card choices are a Radeon HD4350 512MB, a GT220 1024MB, the GT240 or the GTS260. I had pretty much eliminated the Radeon and the GT220 right off the bat and it was a price versus value toss up on the other two.

Even if you don't upgrade the video card, I'd drop the sound card and save that money right away. I'm what most would consider a sudo-audiophile, and with what you're telling me about your setup and what you're going for, I don't think you'll get a very good cost/performance return on the card.
If you don't upgrade the card, perhaps go for upgraded headphones to use with the onboard audio?

The unflappable logic of "save the money now, spend it on upgrades later" has convinced me. I'm going to eliminate the sound card and go with the GT240, then take the money I save and apply it to a next gen video card and/or sound card at a later date (after the release of the next gen video cards). This takes the price of the system down to $890, well within my budget.
Now I just need to convince the wife that we can afford this...
Thanks for all the input people!

You should sneak a GOG in there to bring it up to an even $900. ^_^

Why not just take soundcard from old computer, put it in new one? When I built myself I usually bought soundcards to specifically last me several updates. They tend to develop at a slower pace than other computer related technology.

I'd go with a card from Asus or Auzentech, not Creative. Granted, I have no experience at all of the former two, but they surely can't be worse than Creative's crash-prone drivers, even if Auzentech uses Creative's chips as a base.
</personal opinion>

Personally, I've never once had an issue with Creative hardware or drivers, and I've owned a lot of their stuff over the years. Anyone else... not so much. I have found that most other brands of sound cards are little more than cheap knock offs of Creative hardware, at least at the consumer level. When you get into pro level hardware, things might be different, but I'm not looking for that kind of hardware.

As I grew up in the days of Compaq and Packard Bell, and seeing their use of proprietary hardware, I refuse to buy prebuilts. Even if they are made by a local person, they typically are still more expensive than you could just buy the parts for. And, if you do want to upgrade, you may find problems with hardware conflicts later down the road. As my last prebuilt was in the early 1990's, I am unsure as to how much this is still done today, but I'd imagine it's still done in some sense. As for the specs, I'd recommend going with a little pricier but far more powerful system. Let's price a similar PC via newegg, similar to what my PC is like since I tried looking for good deals and reliability when I made mine:
Core I7 920 2.66ghz - $289
EVGA X58 SLI LE mobo - $229
OCZ 6gb DDR3 1600 - $150
Seagate Barracuda 1TB 7200 SATA 3.0 - $90
Random SATA DVD burner (no IDE ports on EVGA i7 boards afaik) - $30
Now, as it stands, we are at $788, and we have a few options here.
I don't know what you have for a power supply, but it might not be beefy enough to run more modern cards. So, lets throw an Antec 850W Modular SLI certified PSU into there for $150. That brings us to $938. I'd recommend skipping a sound card. I have a X-Fi Fatality. Know where it is? Sitting in my living room collecting dust. I didn't have room in my case with an SLI setup, and honestly, the Realtek Onboard sound sounds absolutely fine.
So, now we have a MUCH more powerful system, minus the GPU, for similar money. I would actually only recommend 3gb DDR3 to start off with since you can usually find it for around $50-60 for three sticks of 1gb DDR3 triple channel ram. And I also don't know what you have for a case, but I'd recommend the Cooler Master RC-690 or the Antec Nine Hundred as both are big enough for modern hardware.
Now for the fun part: video cards. This is obviously going to push you over the $900 price tag, but the performance boost will be worth it. I myself went with two GeForce GTX 260's. You can find them fairly cheap, but usually the better brands are going to cost between $189-$199. This is a good, low budget SLI option. Another similarly priced option is to go with a GeForce 285 GTX for around $360-$380.
So, my advice is to piece your own PC together by buying off newegg, or Fry's if you have one nearby.

+1 Wraith. You make great points about going DIY.
I myself have a machine built by myself, and not only is it cheaper, but there's always the experience you gain and the pride you get when you finish building YOUR OWN COMPUTER!
I tend to go to Pricewatch.com for the hardware prices.