Well most of your hardware is faster than mine and I can play games just fine so I think you either have a hardware conflict or maybe an incorrect config. Check all of your jumpers on the MB to make sure they are correct, make sure all hardware has the latest drivers, and go in and see if any settings for the graphics card need adjusted.
Most hardware defaults to a middle setting which may not be giving you all the performance available. Making small adjustments to the graphics cards settings can make a big difference in performance.
As for the $250 I would recommend upgrading to the fastest CPU your motherboard can support and if that is already maxed out then purchasing some low CAS DDR ram at least another 512mb