I'd upgrade the RAM and the video card. I recently upgraded to this G.Skill 2GB DDR400
(which is now out of stock), and I've been happy with it; you could get another 2x512 MB RAM for your computer.
The fastest AGP graphics card available is the Radeon HD 3850
. Then there's also the Radeon HD 3650
, which is about $40 cheaper ($80 versus $120), and quite a bit slower.
So, for less than $200, you could get another set of 2x512MB RAM (or a new set of 2x 1GB) and the Radeon HD 3850, which seems like the best option, bar getting a whole new system.