Do not buy windows 7 - your computer is outdated, even with upgrading it - XP is still a good stable Operating System and installing Windows 7 on a computer with 5-6 yr old hardware is a bad idea.
You won't see noticeable improvement in Guild Wars unless you install a video card. Your computer currently has an integrated video card, which means it is a chip that is soldered directly to your motherboard (more or less) and cannot be changed. What you can do is buy a separate, "dedicated" video card which will plug into the corresponding slot on the motherboard and give you far better 3D/gaming performance.
Nothing you can do to your current computer will enable it to compete with more advanced (new) computers. However, installing another 512mb of RAM and a different video card will let you play GW.
You need to make sure you get the right kind of RAM....
# Technology DDR SDRAM
# Memory Speed 333.0 MHz
# Memory Specification Compliance PC3200
# Form Factor DIMM 184-pin
Also the right kind of video card.... I'd suggest this, it's about as cheap as you will get and will at least let you play GW without throwing too much cash into what is already an outdated pc.
http://www.newegg.com/Product/Produc...82E16814187041