If your comp is very loud then my first guess would be your RAM - instead of holding data in the RAM, it has to keep swapping from the harddrive, which takes longer than accessing it simply from RAM. If the red light on your comp case is blinking constantly as well, that may well be why. Alt-Tabbing will also be a nightmare, if this is the case.
If you've got Windows XP go to Start>>Run and type "DXDiag" (no quotes) and it should tell you your RAM. It'll also tell you your graphics card. I'm not sure if the same works in other OPs, but if I right-click the desktop>> properties >>settings it has my card listed on there anyway. You may see the RAM etc in the DOS-screens when you start up the comp, though if your comp is quick you may miss it.
RAM'll help with multitasking in general and a few of the newest games are needing 512 minimum. It probably won't help with putting up the quality of your graphics but it may help with your lag.
As far as graphics cards, I believe larger ones may take some of the pressure off lag too but I'm not 100% sure. My worry is you'll get a brilliant video card that can handle reflective water and everything, but your comp won't be able to handle it for the small RAM, or troubles with compatability (I don't think I've ever heard of software compatabilities with RAM, though you do need to make sure it fits your motherboard :laughing: )
edit: one stick of 512 costs about £30 here, so ...50$? but since you already seem to have 256, just another stick of 256 (providing your motherboard has room) should be even cheaper.
My graphics card was ~£40, so 60-70$? It's 256mb and does reflective water and everything (note I have 1gb RAM anyway so that may be a factor) The longer you wait for a graphics card the cheaper they become as new ones come out, so there might be newer ones than mine (Nvidia GeForce 6200, has some trouble coping with the massively resourcey games (like Black and White 2) so in a while there'll probably be a few step ups that are around the same price. It's already almost £10 cheaper than when I bought it ¬_¬)