You probably could end up with better than the setup I have (which I paid $720 in 2008 for the CPU, motherboard, video cards, and RAM - the remaining components I already had and you may too, if you don't mind scavenging your old computer) for that sort of money. I would make the assumption you already have a serviceable keyboard/mouse/monitor/speakers too.
Intel Core 2 Duo E8400 (you might want to look into i5/i7 solutions at this point)
Asus P5Q Pro (as above, might want to find an LGA1366 solution for i5/i7)
4GB (2x2GB) DDR2 800MHz (faster RAM, and perhaps DDR3, may be available for comparable prices. Don't forget to get matched pairs for dual-channel or matched trios for tri-channel)
2x ATI HD4850 in CrossFire (at this point, this is likely no longer the most cost effective solution. You may want to look at budget HD5000 series cards, and if you're patient, nVidia Tesla to come out - competition may slash prices)
Those are the components that were new at that point, with an existing case, hard drives, optical drive, and power supply. Note if you're scavenging your old computer for these parts, especially if it was a pre-built, that you check your new stuff doesn't outstrip the power supply's rating. I like this tool: PSU Calculator Lite
As I mentioned, I [re]built this rig in 2008, for not a ton of money. After the 2006 shift to Shader Model 3.0, there hasn't been a great deal of change to the current graphical paradigm. With all the extra power GPUs are breeding with little to do (except push more frames on demanding games), you're getting boutique GPGPU pushes like PhysX that don't have a major (for now) impact on gameplay, and some increment improvements like DirectX 10 and 11 that have had minimal effect on visual quality (although local tesselation might improve fine detail, I don't expect games to make significant use of it yet, especially not until Windows XP is dead).
The following are a non-exhaustive list of informed generalizations about the platforms.
You will get:
Higher true resolutions (as opposed to rendering at a lower resolution and upscaling, if you have enough GPU power and the monitor to support it)
Higher texture resolution (if you have enough memory, which is pretty easy these days)
Faster loading times in properly optimized games.
Player-created content in titles that support it (either officially or hacked-in)
You'll miss out on:
Insert-and-play gaming (You'll have to deal with installations and sometimes troubleshooting much more often than with consoles - I know this for a serious fact)
A majority of local multiplayer (there is an assumption for many games of one PC to one person, although some titles, for example Trine, may give local multiplayer options)
A minimum guarantee of performance (console versions have an individual set of specifications to conform to, and may be optimized to the last bit for them, while PCs are a broad performance target)
Admittedly to me what makes it worth it is a combination of the tinkering aspect of hardware and software, the ability to use my computer for more than just games (although admittedly these applications don't have as steep requirements for performance), and the high visual detail attainable when you have the right equipment. Troubleshooting is much less frustrating if you research the issues and learn to resolve them yourself, although obviously not everybody is going to put the time in to do this. Hint: searching the Internet is an EXTREMELY helpful way to find solutions for errors, especially using portions of the exact wording of error messages. Watch out what you install in the background, too. A lot of popular security software is highly invasive and may negatively impact gaming.
Addendum: speaking of failures, a lot of PC hardware from decent vendors (ASUS, EVGA, BFG, etc.) has 3-year warranties on components for pretty much anything that isn't your fault. Obviously this is probably about as annoying as sending in a RROD XBOX 360 unless you have backup components, but I haven't had to use mine too often. Most recent case was a 4850 fan dying (I didn't feel like paying for a cooling kit and voiding the warranty at the same time). Sent it to ASUS, and their warranty depot being out of 4850s, I got the offer to receive a 4870 as a free replacement.
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