You need to look at what you have and what you want. I was faced with the same problem as you, i had an old crap computer and wanted to upgrade it for great performance. When you look at all the upgrading you will be doing, the only thing you will be left with is your case and hard drive. To me, id rather spend a couple more hundred bucks and get another computer. That-a-way if you want to use your "crap" computer for something else... or sell it? you would have that choice.

If you do decide to go the upgrading route, I can tell you right off the bat, The core i7 burns hot. The heatsink that comes with the i7 will NOT cool sufficiently. If you look at getting a new heatsink make sure it fits in your case . Make sure you also have enough fans / airflow in your case to cool your new vidcard, ram, and processor (which will be generating more heat that your old components)

most core i7 boards only come with one IDE connector. so if your hard drive and DVD drive both use IDE, you will have to either upgrade one or purchase an IDE expansion card that fits into your PCI slot.

Also, you can't just change your system to a 32 or 64 bit system. This is dependent on your CPU, luckily all core i7's (to my knowledge) are 64 bit processors. this means that you must purchase a 64 bit operating system.

As Zanthor said, you will also need to upgrade your power supply unit especially if you are getting a better video card (they require 1 sometimes 2, 6 pin connectors for xtra power)

So if you upgrade your motherboard, ram, and CPU, you will also need to purchase a new operating system, power supply, and heatsink, possibly an IDE expansion card.

Dont forget about all of your old parts, are you just going to throw them away? sell them on ebay? its much easier to sell a whole working computer imo.