What PC spec for HDTV

I currently have my PC connected via VGA to my HD LCD TV.
I have viewed some of the 720P WMV downloads from the Microsoft site but not that impressed.
I could do with knowing what hardware & software I should have to know I am seeing HD properly.
Current specs are:
XP PRO SP2
AMD Sempron 3000+
AGP Nvidia FX5200 graphics 128mb(VGA output)
768 RAM (DDR PC3200)
Power DVD 6
Toshiba 32wlt66 LCD (VGA, HDMI, component inputs)

I suspect the following might need to change but need advice,
Graphics card, is AGP interface ok ? is VGA connection ok?
Suspect i also need a card capable of Nvidia Pure video Drivers
Can the AMD sempron handle at least 720P?
Not sure about software.
I had the PC before the LCD & never intended to have a HTPC and I just wanted to see some HD on the TV (without subscription services)
The WMV files played OK but did'nt look any better than my upscaling DVD player can do.
Also, the native res of TV is 1366 x 768. Closest I can get the graphics card to this is 1360 x 768 which looks fine for Desktop & general PC use but do I need to match the native res with custom timings??