Your system should be fine. I have heard of people doing it with less than that. Depending on what you are doing, some things may take a lot longer (like compiling, transcoding, compressing) but it should still work. You do need to have plenty of hard drive space avalable though (minimum of about 8 gig free to copy a movie, but I would recomend having a lot more that that if possible).
Just out of curosity, how do you have a little under 500mb of ram? I'm guessing multiple memory modules of diffrent sizes?
As far as the sweet spot for an upgrade, I'm sure that opinions will vary quite a bit thier, but my opinion is that (if you are building a system or upgrading yourself at least) , an athlon 64 3000, socket 939 with 1 gig of ram gives a pretty good ballance of performance and price. 140 for the processor on newegg (I have seen it go as cheap as 110 on sale on newegg), around 100$ for a decent motherboard like an abit, 80$ for two good 512mb mem modules like kingston or coarsair value ram).