Well, if you are really on a budget, you can probably get by with just upgrading that ancient video card and get some extra RAM. You can get 4GB of DDR2 for $70 (pretty expensive compared to what you can get with the current DDR3 RAM prices, but cheaper than new motherboard+processor+ram). Then just get new graphics card that you can fit in your remaining budget. You should be able to get a decent card if you can spend ~$150 (like an Nvidia 650 TI 2gb card, or AMD 7770 2GB card... personally I prefer the Nvidia due to their much superior driver support). You might have to worry about your power supply upgrading to a powerful graphics card though. Most people will recommend a 400W power supply for either of the cards I listed.
But it is true that your system is pretty long in the tooth. It just depends on if you have the budget to properly upgrade at this time or not. A new motherboard+CPU+RAM is gonna be in the $400-600 range depending on what you get, and will almost certainly require a new power supply (another $80-100), and then the video card as well.