If you go to build, I would definately go the AMD route, as it will save you money. Aim for a lower-end cpu and a better video card, rather than the build list in this thread with the E8400. Video games are much more gpu bound than cpu bound. I know you can come up with a complete tower minus the video card for about $300 if you settle for an Athlon x2 4600+ or so. Even less if you don't spend $50 on a case. For a psu, check out the Hec Orion 585W dual-rail.
A budget gaming system for $500 is easily doable.
Here's a quick list of a budget system, of course it would need tweaking, but you could no doubt get an 8800GT for a video card and keep or upgrade the cpu even more:
Processor Athlon 64 X2 5000+ 2.6Ghz $87
Mobo Biostar A770 $70
Memory G.Skill 2GB CL5 $43
Hard Drive Western Digital 160GB Sata $45
Optical1 Samsung Dvd Burner $27
Case Coolermaster Centurion $50
Power Supply Decent One $50
Video Card Asus GF 9600GT 512MB $150
Total w/ 9600GT $522
The above list was just something I found saved on my HDD. It is relatively close to what I would do...but needs changes in a few areas. It is more to show you just how much you can get for $500.