The system in your sig would easily be able to play HL2 and CSS on medium settings if not high settings, though I don't know if it's below $500.
I see possible improvement for the motherboard, HDD, and PSU.
Since you want to be an overclocker, you obviously want a DFI. I'm not too up to date with the DFI boards; hopefully someone else can help you with that.
For your HDD, I hear that Maxtor isn't the one of the better brands. Consider a Seagate Barracuda or a WD Raptor for speed. Like said, you are using your current HDD so no problems there. Keep this in mind if you want to buy one in the future though.
If that's a case PSU, you may want to buy a brand-name PSU. I don't think your system will require a load of power, so look into any of the name brands (ie. OCZ). Since you're overclocking, you will definitely want a PSU that can pump out some power and has good fail-safe features. I know the OCZ Modstream is a very good PSU. Get the Powerstream if you want to spend the extra bucks.
AGP is relatively cheaper, but there were some cases where the PCI-E GPUs were cheaper than AGP. I don't think the price difference is insanely different. For the sake of "upgradeability", you may want a PCI-E.
If you want to be a huge overclocker though, you will get nowhere with stock cooling. If you don't want to go with a water rig, look into getting a CPU heatsink. There is a Zalman out there which got good reviews. The Thermalright XP-90c is a very good heatsink and will make a drastic difference in temperatures.
I would strongly suggest a water rig if you want all the possible OC. You can get an aftermarket cooler, but the key difference there is the temperatures under load. That XP-90 will reduce idle and load temperatures, but it will still run much hotter under load. A water rig will not only decrease temperatures at idle but the delta temperatures between load and idle is very minimal. Some people get a total difference of like 3 C, perhaps running 40 C under load.
