May not be too much of a problem right now, but it will be soon. OK, a lot of games are perfectly fine on a DX9 codepath (and your current graphics card isn't fantastic at tesselation, which is a DX11 thing), but you may find yourself cut out of the loop if you stick with XP.
I'd grab some more RAM though while it's cheap - jump up to 8GB, do Windows 7 64-bit and you're set for a long time to come.
If gaming is important then you want Win 7 since Win XP only supports up to DX9.
Games have started to drop DX9 support like Just Cause 2 and Battlefield 3. Actually, the first game to drop DX9 support was Halo 2. Halo 2 only used DX9 effects, but it required DX10 to run. Microsoft did that to force people to buy Win Vista.
(1) First Upgrade the ram to 4 gigs. That will give you approx another half gig but more improtant allow the ram to run in daul channel mode.
Do not go with the 8 gig upgrade, Your using DDR2, unless you plan on keeping your current system for at least two Years. Most games do not see a big boost going from 4 -> 8 Gigs. A new system down the road will require DDR3.
Note: with 4 gigs you will lose ).5 -> 0.75 Gigs due to the 4 gig limitation of 32 bit operating system, Win 7 64 bit will give that back - but this is not a biggy untill you go above 4 gigs which requires 64 bit Windows. So this can be delayed untill you get new system depending On:
(2) If using/need DX 10 or 11 then win 7 is a must and might as will go 64 bit, But again:
(3) To do, or not to do?? The question is Now or later - Your call. But keep in mind that Windows 8 is on the horizon. ?? Sometime in 2012. I've heard as early as 1st quarter of 2012 and as late as 4th quarter of 2012. Hopefully the RC version (Free but can only use up to 3 monthes after retail version is available) will be out around the end of this year (Sept->Dec time frame).
For this reason it may be more advantageous to wait - spend a $100 now and find out that Win 8 has features to die for and spend another 50-> 100 Dollars. You could also delay untill you can buy Win 7 with FREE upgrade to Win 8 - May be the best option.