I highly suggest you wait until the system builder marathon $500 article is released tomorrow. These builds tend to be a great starting point for a custom build and can be tweaked to match your friends needs more closely.
To be considered a "gaming PC" I would not spend less than $150 on the graphics card (often the weakest link).
In fact, when you factor in $100 for Windows 7 x64, a PSU, case, tax, shipping etc it's very difficult to build ANY desktop for $500 or less.
It's important to note the following:
System A: basic PC ($500)
System B: basic PC + $200 (better graphics and CPU)
The extra $200 in System B would make a far, far better gaming system. Once you shell out the minimum to build a system if you spend an extra $200 for better graphics and CPU it makes an incredible difference.
If you can't spend more than $500 my advice is basically to get an XBox Slim, but forget about PC gaming.