All iMacs are able to handle HD content. No need to worry about that.
The difference between integrated and dedicated graphics cards is that an integrated graphics card is, as the name suggests, integrated into the computer's motherboard. They are usually slower than a dedicated card and share memory with the main system RAM, reducing the computer's overall available memory. However, they are cheaper and use less power (which is good for laptops, where they are more often used), and for normal desktop use - ie. internet, typing, watching movies (including HD) - they are perfectly fine.
Dedicated graphics cards are more powerful and they also have their own memory, and for normal usage as I said above this is the main difference, because no amount of system RAM is compromised for graphics display. Also, if you're into gaming at all this would be a must.
You've mentioned that the inability to upgrade cache may be a concern, and it's the same with the graphics card in this case. Whichever option you choose, you'll be stuck with.