If your case is 778 form factor (if not buy another case), buy a mobo (with 2x pci-e slots) for around 100$ buy a cpu for around 190$, buy a pci-e video card for 130i$sh, keep your old keyboard, monitor, dvd burner, mouse, hard drive, speakers. And poof you have a huge upgrade.
Total 420$, youll be able to play all the latest games at max settings with good fps, if you play at really high resolution (higher than 1680x1200) you may need to spend a little more on a video card.
Of course you will need to make sure you have a adequate psu. Im not an expert but iv been shopping\learning around a lot recently, anyone correct me if im wrong.