FWIW: I salvaged one of these from a local recycle center and it's a decent machine.
RAM:
I installed 1 gig of ram (2x512) for free with salvaged parts. I have read that if you do a bios update you can go to gigs (2x1gb). I didn't go this route because this machine doesn't see much use.
Hard Drive:
I ordered a hard drive caddy for $3 on ebay, and installed a salvaged 60 gig drive.
VIDEO:
I got a 64mb ATI radeon on ebay for $15 with free shipping and it works marvelously. I get better resolutions and less skipping with this upgrade than before with the 16mb card.
Network:
Haven't upgraded the wireless yet, though it is definitely the weak link on this machine. It is only A&B bands... so it's pretty slow. Might take out the installed card and just run a 54mb/sec PC card. You can get one for $15 these days.
Processor:
Thought about it... can get a used one on ebay for $10-$20 with free shipping... just not sure if it's worth it. Thsi would be the last thing I'd upgrade on this machine.
I don't play games with this machine, so I can't tell you what it will/won't run... mostly it is used as a tertiary machine in my house for watching netflix, or movies off the NAS when I'm in the kitchen. If I spill something on it, I'm out a total of $30 (the power cable I ordered was $10 on ebay) anjd a few hours of my life... so for what it is I am very happy with it.
If you can come up with another $200 in your budget, look at the ACER 7750-6669g. It was $650 when I bought one new last year and it is an amazing machine for the money (a comparable dell or lenovo would have run me over $1000... I got mine for $600 plus shipping). I used to be a namebrand guy when it came to computers... not anymore... I've had 2 HP's crap out on me in the last 2 years, but that ACER is still going strong after 20 months. If it doesn't die, it will be a machine I can use for anything (even gaming) for the next 3-5 years (i5, lots ram headroom, 1 gig dedicated radeon video, dual hard drive bays, dvd burner, blue ray optional, etc etc etc). There are probably newer versions out this year for the same price... go take a peek.
If you're just looking to extend the life of the Dell you have, the video upgrade is possible for less than $20, then I'd upgrade the ram (2 gigs with the bios update), and the wireless (with a PC card).
One last parting thought... have you gone to the local recycle center that takes "e-waste" and asked if they'll let you pick through their bins. You could probably piece together a decent dual-core system for free. I have salvaged 4 systems with monitors, and keyboards. I had to buy ram, and a hard drive ... but I was only out $100 total and had a working machine that would run win7-64 bit like a champ. You may have to go back a few times to get lucky. My current desktop is a junk-yard special that I invested $300 into and it gets a 6.9 (sata II hard drives are "slow") on the win 7 experience scale and I run games on it all day long.
Well, I guess you got $1.25 instead of just 2 cents... hope it was helpful.