Yep, that Radeon card should be fine for playing games at around Medium quality settings, and yes, 1gb is probably the best soloution for you, at least for the moment.
Yep, i'll look for processors for you. I'll try going for the highest which it can support, and then narrowing down until I get one at the price range:
Heres the best one available for your system (The AMD Athlon XP 3000+ (just as good as a Pentium 4 at 3.0GHZ and so excellent
This is a great online place by the way, and have very competitive prices. Deliveries are also on time every time too if you order before 5pm.
This processor costs £80.99, not bad huh? and so within your budget
A slightly slower one but cheaper is available from here too (The AMD Athlon XP 2800+ (the equivilent of a Pentium 4 at 2.8Ghz):
This one costs around £60 and so again, way within your budget, and only £10 more than that extra 1gb of memory would have cost you.
Any of these two are a great purchase, and so its completly up to you. Both are also compatable with your motherboard and will speed the system up considerably from what you have now, and also games
I hope this helps!