Where would I get the most bang for the buck? My guess is video card, but the power supply in the XPS420 isn't big enough to run a big bad ass vid card (especially the ones that require a 12v lead from the PS itself.) So if I upgrade the vid card, I'll need a new case since I can't seem to cram a PS in this one, as well as the new PS.
Like he said your video card is definitely your bottleneck. I'm an overclocker so after that of course I would naturally recommend that you see if you can overclock your RAM and your CPU. I know for a fact that CPU can do at least 3.6Ghz. You're probly going to need better cooling for it though. Your chipset can't really ever be a bottleneck... provided that you can actually overclock a computer. I mean I guess it could, but by that time you need a new motherboard anyway so the point is a little moot.
As for the Video card, yeah the GTX 260 is a nice card. I don't know how high that system can go before the rest of the system is bottlenecking the card though. I'd probly just shoot for a GTX 285 or something if the motherboard does not have an overclocking bios and cannot be upgraded to one.
Thats probabably a BTX motherboard, so if you look into a new case make sure it will work. BTX was supposed to replace ATX but didnt and Dell used it for awhile, not sure if they still are. The reason i mention it is if the PSU wont fit in the Dell case.
The trouble with doing something right the first time is that nobody appreciates how difficult it was.