Well what kind of processor do you want AMD or Intel? If you're going to spend around 400-500 bucks (I'm assuming you want AMD) I'm thinking:
1) socket 754 or socket 939 board
939 being more expensive than the socket 754
($75 bucks to $150)
2) AMD Athlon 64 CPU around 3000+. (That's almost 3 times as fast (probably faster realistically) as what you have now just for the CPU.
socket 939 chip being about 40 dollars more expensive than the socket 754 variety.
3 ) Video Card- Either ATI or Nvidia get 256MB if you can, if you want cheaper go for the 128 MB cards (about 100 bucks)
4) 512MB DDR Ram (I think around 80-100)
I got all the price ranges off of pricewatch.com so they may vary day to day.
Going with a socket 939 system you'll top out around 500 bucks (maybe a little more) and have a clear upgrade path as long as you can reuse as much of your old system as much as possible.
Socket 754 will be cheaper but it looks like it's being phased out eventually but then again by the time you need more performance you may just do another CPU and MB upgrade in another 3-5 years so maybe the socket type will not make a difference.
(I really don't see a difference between the two socket types)
Either way you have a decent system and be able to move up to WinXP 64 Bit edition coming out in a year or two
This is for an AMD Athlon 64 bit system...moving down to a Barton Core with a socket A at an Athlon 3000+ would probably be cheaper around 300-400
Like I said you'll have to do research but this is just a general idea.
I'm planning on doing the same thing you are but I'm gonna wait for prices of some of the newer CPu's and MB to fall a little more so I'll start early next year.
Antec Black Case
Athlon 1700XP 266Mhz Bus
512MB Pc2700 DDR Ram
WD 7200RPM 40 GB HD
Maxtor 8GB HD
Geforce FX 5700LE w/ 128mb ram
SB Audigy Card
Win XP Home Edition
Altec Lansing 5.1 Speaker System