Customized computer?

[enkoujin]

I bought this customized computer about five years ago and it's not running smoothly anymore because I get sudden restarts, frozen programs, BSODs, etc.:



When I have free time, I plan to reformat my computer as I see this might be a solution to all of the problems above (the other being a possibly damaged sound card or bad memory). The question now is - should I stick with Windows XP this time around or switch over to Windows 7 with a few computer upgrades here and there?

If I do switch over to Windows 7, what are some new parts are still compatible with my computer (socket am2/DDR2 SDRAM) and will be able to boost my performance to run Windows 7?

Are there any specific sites that help beginners with upgrading and the transition to these new functions/parts? To be honest, I barely know what any of the acronyms above mean and what they do aside from parts and their functions.

My budget's around $700 and the most demanding programs I'll be running would probably be Starcraft 2 and some PS2 games.

As always, thanks in advance!