It really depends what you plan to do with it. Your setup is descent for the normal tasks (Word, Photoshop, IM/Chat, Browse the web), but it definetly could use some work. The first two things to take into consideration are the HD and your memory. These two things will slow you down a lot. The hard disk the older it gets, the less it performs. Your processor is adequate for normal tasks, so I dont think that needs upgrading.
So heres my tip:
Definetly upgrade your memory, 256MB is obsolete. The norm now adays is roughly 512 - 1GB. I definetly recommend going up to 1GB (2x512 dual channel), you will instantly feel a change. Then go for the hard disk, keep it at 7200RPM but up yourself into the 80-100GB range. While 40GB might seem enough for you, hard disks now are cheap anyway. You can find a good 120GB HD for about 70$ on newegg.com.
Anything else you upgrade would really be a luxury. I personally demand a lot of power from my PC, so I have a dual core setup with the works. But like I said, if you plan to use it for day to day tasks, stick to whats simple and works. Of course, an LCD would also be a nice idea (More so if youre still using a CRT).
PS. Build it yourself can be cheaper than buying from a retailer. You just have to know how to go about buying your parts, and what to buy. You might not get those horribly bad 1 year warranties, but atleast you know you built it yourself. And in the end, if you can build a computer, odds are you can fix it yourself. Ive done it quite a few times.
PPS. After reading up on your system, here are links to parts I recommend. The memory I used before in a previous system, very reliable and fast. Ive also had experience with the HD drive I provided below.
Memory @ NewEgg.com
Hard Disk @ NewEgg.com
I know earlier I said 80-100GB, but you cant beat the price. I also chose that one for its 16MB cache. But you can find smaller sized hard disks, for a smaller price. And if you havent noticed, I have a slight adoration for newegg. They have never let me down, and their service is sharp. If you want future proof, you can buy a SATA to IDE adapter and purchase a SATA version of that HD. Like that in the future, you can just hook it up to a new rig. The memory might be a problem, considering its only PC2700. Most mainstream PC's now adays are DDR2 PC5400 and up. Good luck to you!