Your OS is fine for gaming, you processor is fine for gaming, your memory is fine for gaming, what isn't fine for gaming, is your graphics card.
You would be better off spending your less than $100 on a better graphics card, then your gaming would improve a hell of alot.
now can I draw your attention to:
http://www.newegg.com/Product/Product.aspx?Item=N82E16814102719
the ATi 3870 will play any game that you could want that is out at the minute, with the exception of the massively demanding games like crysis, arma2, GTA4 etc on medium-highest settings with no problem, yes, even with your system now.
When you have a bit more money, then upgrade your memory, a 2x2GB PC6400 800MHz kit would be the best option, from there, anything else would be a new motherboard job and a new processor and a new power supply, it is constantly evolving though, as any good system should be
can I also draw your attention to something else, if you get a new graphics card, you can sell your old one and get funds for something else, maybe even getting a slightly better graphics card than the one picked, maybe getting that memory now aswell as the graphics. To give you an idea of how much it would be worth:
http://computers.shop.ebay.com/Comp...9500gt&_catref=1&_fln=1&_trksid=p3286.c0.m282
by the looks of that, maybe an extra $40, which you could probably put to best use saving for tthat memory or getting a slightly better graphics card, for example:
http://www.newegg.com/Product/Product.aspx?Item=N82E16814150441
please note with that though, you may want to buy an after market heatsink and/or fan for it too because the coolers were so badly designed on them, the air is blown into the case, not out, but a new heatsink and fan soon sorts that problem out, or even a vent on the side panel