I am currently using these desktop specs:

Windows XP
4400+ X2 (939)
2GB Ram
Nvidia 7800GT
550W PSU

I don't game at high resolutions, but I like the game detail settings to be high with some AA and AF enabled. I have noticed that on some newer games they struggle on higher settings on my computer. Supreme Commander gets really jerky when the action picks up. I'm on a budget, so I don't really want to change the CPU and the graphics card because a CPU upgrade would also require a new Motherboard and Ram. I was thinking of either purchasing a ATI 2900XT or buying a cheap C2D and overclocking it. Which would give me the bigger boast?

I had a similar set up with a 4200+ X2 and 2 7800GT's in SLI. I upgraded to single 8800GTX and saw huge gains in games. I am in the process of building a new pc with a e6850 and expect some good gains from that, but not as much as moving to the 8800.

I have an identical system except my GPU is a 7800 GTX. I'm OC'd to 2.6 (essentially meaning I'm running a 5200+) and if I were looking to upgrade it'd definitely be a new graphics card. Your card has 4 pixel pipes shaved off on mine so you're even more in need of a new video card.

any dual core proc is fine for gaming, get the 2900XT if that's your choice (over an nvidia) and you'll see huge performance difference to that 7800

I'm running a 4000+ single core, 2GB of RAM and a GTS-640 and I get no slow down or jerkiness in any of the games I play @ 1280x1024 with 4xAA and 8xAF (including COH, GRAW2, C&C3, BF2142)

I used to run a 7800GT and BF2142 I got <20fps when inside a titan on those settings, switched to the GTS and now I get a fairly steady 80fps

I say get a new card , and OC ur CPU , ( X2 4200's are pretty good OCer's )

Graphics Card

This is a no brainer - get a new graphics card.

4200 x2's are crap overclockers lol.

when i had my x2 4200 , i OCed to 2.8 with stock cooling and no voltage change , i also have seen many hitting 2.6

My 4400+ X2 is a rather poor overclocker unfortunately

yah videocard is the culprit

it would cost you alot more to build a whole c2d system than to get a new VGA card. keep your system and get the best graphix card you can afford and you will be happy.

That isnt even an AM2 chip is it. Why the hell would you even consider upgrading an obsolete socket. hehe. Get the vid card and switch to C2D as soon as you can cause even my E4300, the slowest C2d you can get, at stock 1.8Ghz is about the equivalent of an X2 5000

diffinatly the gpu if you are a gamer! it make a huge difference at high resolution the cpu will only affect a few cpu intensive games

A new gfx card would get best bang for ur buck.
Tho just be aware that Supreme Commander is a cpu based game, so a new card wont help that game much.

a new gfx card for a kickass rig!!!