Since you sound like your on a budget, you may consider a cheap AMD dual core system. However some of the core 2 duo chips are said to overclock pretty well.
If you've already got the 8500gt, I think I'd go with something dual core, the fastest you can buy, and get another gig of memory to match the stick of 667 you have already, and a new board with some overclocking headroom in case you want it, and a better power supply. Possibly new case if you have to. I think I'd stick it out with the 8500gt for now though. Get the base of the system going first. While the 8500gt is low end, it's still current generation. Hold onto that and save your money for something like an 8800gs, 9600gt or 8800gt. But if you get a faster chip and more memory, I think you would essentially make it to where your video card is the bottleneck, and you may not play at high settings, but you should be able to at least play your games. Because I'm on a low end card myself, an old 7300 LE that I got on ebay for 13 bucks or something because I was making the switch into a new chip, board, and pci express interface, so didn't have a lot of money to spend on video card, so picked that up as a place holder to get me by. Actually suprising how well it does for how much I paid.