I have a network problem that requires a secure link between to locations and I think IPSec will do the job, but I would like some guidance form people who know better than me
PC1 at Site A will be sending UDP data packets to PC2 at Site B via a dial up link, occasionally PC2 will reply to PC1 again via UDP. PC1 and PC2 are the only systems that will pass data over the Link.
I intend to have a 2801 fitted with an analogy modem card (WIC-2AM-V2) at each site and configure dial-on-demand routing, IPSec and Firewall but not to use a VPN.
Is this setup OK or have I missed something?
If you need an ecrypted secure link then IPSec is the way to go.
I get the sense that you are thinking of IPSec and of VPN as separate things. Generally when we configure IPSec we are doing it to create a VPN connection. So for most of us the terms are pretty interchangeable.
It depends on what feature set of the IOS is installed on your router. If it is the Advanced Security or Advanced Services it will include the software to do IPSec. If it is the IP Base or IP plus feature sets then it does not have the ability to run IPSec.
 one other thing occurs to me to mention. IPSec does not really care what media it runs over as long as it has IP connectivity between the 2 IPSec peers. So in that sense running IPSec over dialup should be fine. But assuming that you are talking about normal dialup the dial link will be down most of the time. When the application attempts to send data it will need to bring up the dial link. It will have to initialize, call, and authenticate before it is ready to pass traffic. Then the routers will have to negotiate ISAKMP Security Associations and then IPSec Security Associations. So there will be some amount of delay before the application traffic starts to flow. Will that delay create any issues with the application?