If you have a tight budget, a new DDR3 mobo and DDR3 ram would not cost as much as you may think, it would also give a good boost to your system. The cost of a DDR2 mobo is around the same as a DDR3 mobo (with a wider selection) and DDR3 ram is dirt cheap. With DDR3 @1333MHz you would also almost double your ram frequency (speed).
On the other hand if you do have a larger budget you could go with the second option.
I don't know much about what the market translates to in terms of Australias market, but I know its annoying to scrap perfectly good parts, unfortunately, its almost always more cost effective and advantageous in performance to scrap the dinosaur and start fresh.