A lot of very good advice up there, especially specific tips from jyl, a few notes:
replace the knobby tires with slicks ($50-ish).
Nashbar sells 26" slicks (and I mean slick!) that are often on sale for $10 ea, and very well reviewed. I use them myself when I want to take my mtb on the road for a tour.
Absolutely do not get a new WalMart type MTB for $250 - the twenty year old MTB is a far better bike.
+1000000!