I'd say slayer's comments regarding amd drivers a bit off. I haven't had issues in the past 3 cards I've gotten from amd.
In your price range the only sensible thing to upgrade would be the video card, and because its a pre-built system, I would assume your power supply isn't very good/big enough.
I would suggest a ati 5770/6850 or a nvidia 460.
Changing your processor will do very little for gaming, compared to a new video card.