Your computer is not as bad as you believe. You only need less than $130 in upgrades. $170 if you get some ram.
The processor is fine, I could play Crysis on an AMD X2 3800+ (although I overclocked). The fastest CPU your motherboard can support is an AM2 5000+ so it's not really worth upgrading at all.
The most important thing for you is to get a new videocard.
http://ncix.com/products/index.php?s...r&promoid=1141
I think a 5850 would be good future proofing. It's $119 after rebate. Shipping is only $5.99 for this sale. That said, you are a bit CPU limited which could be a bottleneck (videocard is faster than your CPU can keep up with). You could get away with a $60-$75 videocard like an 8800/9800 GT that you find used on kijiji/ebay.
You could use another gigabyte of ram. For the ram, you need to figure out how many sticks of ram are currently installed. If there are two sticks of 512MB DDR2 in there, you could put another two sticks of 512MB DDR2. You could get away with spending $34 for two sticks of ram.
http://www.memoryexpress.com/Product...X3985(ME).aspx
Your ram is what is sitting in those long blue and black vertical slots on the right
This is your computer right? It should be somewhat upgradable since it has an AM2 processor, 4 slots for PC 4200 (533 MHz) and PC2 5300 (667 MHz) DDR2 DIMMs, and a PCI-E x16 slot for video.
http://h10025.www1.hp.com/ewfrf/wc/d...roduct=3239117
Your computer is too limited by the CPU to really spend $500-600 on it. If you wanted to spend that amount, I'd sell your old computer and buy an entirely new one.