That C2D / DDR2 system will have no upgrade room in a couple of years. It'll be a strong enough system for now, but the following will have a lot of headroom for upgrades.
CPU : $75 AMD Athlon II X3 440
MOBO : $90 ASRock 870 EXTREME3
RAM : $90 Mushkin Enhanced Silverline 4GB (2 x 2GB)
HDD: $55 SAMSUNG Spinpoint F3 500GB
PSU: $55 OCZ Fatal1ty OCZ550FTY
GPU : $140 Sapphire Radeon HD 5770
DVD : $21 LG SATA DVD Burner - Bulk LightScribe Support
Case: $50 Rosewill CHALLENGER Gaming ATX Mid Tower Case
Total = $576. The Mobo can be cheaper, the PSU can be cheaper, as can the Case. Still, a good gaming build is difficult to have for under 500 using quality components.
Cheaper Mobo : $60 ASRock M3A770DE
. Support for DDR3 1600 off the rack, but no USB 3.
Cheaper but reliable PSU brand : $40 Rosewill Green Series RG430-S12 430W
(31A on the +12V Rail should be good enough for the 5770)
Cheaper No-bling Case : $30 GIGABYTE SECC ATX Mid Tower Case
That brings it down to $511. That's as far down as I would go. I won't downgrade the GPU for a gaming build.
EDIT - You'll need a different (read - more expensive) PSU if you wanna OC (CPU,RAM,GPU) & XFire the 5770 at the same time.