Actually, a PCI video card would be your only real upgrade. You are wrong about your onboard graphics, actually. While your onboard may be using your system memory, it is still only as fast as the RAM can go, plus it is stealing its use from the computer thereby hampering its ability to function optimally. The onboard is also using some of your CPU to generate the graphics you see.
A graphics card removes almost all of the work from the CPU and uses its own RAM. Even a DDR card will have faster RAM than your system has, and some PCI cards have GDDR2 RAM to boot.
The main things to consider is how much you want to spend. After that you have to make sure that your power supply is up to the task of the new card; if it is not it will need to be replaced in order to utilize the card at all.
If you haven't maxed out the RAM for your system then that would be a doable upgrade as well.
Honestly, although mikesgroovin was a bit uncouth in his delivery, your system is basically a money pit as far as upgrading goes. You would be better served in replacing the system. Even a four year old computer that is hopelessly outdated today would run circles around your computer. Even the cheapest, smallest computer listed on NewEgg would be a major improvement for you.
Newegg.com - Acer Aspire Revo AR1600-U910H Intel Atom 230(1.6GHz) 1GB DDR2 160GB NVIDIA ION LE graphics Windows XP Home