There is a couple of problems with what you are planning on doing with your dell.
1) I don't know what mother board yours is,
and im not sure if it could even handle upgraded components such as a new CPU.
(Most dell motherboards are made just for a specific CPU, and changing the setup would mess up the reliability of the system.)
2) If wanted better gaming power you would need to pop in decent video card, and I'm not
sure if the dell stock power supply could even handle the increased power load.
(Dell is notorious for using power supply's that just barely power everything that is stock.)
Your best bet is to probably just upgrade the ram to 4 gigs, that is the max your pc can handle.
You can get 2 of these, which is two 1 gig sticks in a pack.g.skill ram @ newegg
Other than that, it would be cheaper to have a gaming PC specifically built for your gaming needs.
Since the dell would have to be overhauled anyway, and you could even get dual or quad core if you got one made for you.
A decent gaming computer can be built for a little under 500 dollars, or even under 400 if you cut back some on components.
I would be more than glad to help you out if you would like to go with a new gaming pc,
but if you decide to just keep the dell I would say just upgrade the Ram.
Anything past that would just be a waste of money ,and you would be kicking yourself a month or two down the line.