Hi Cam5X5 and
For $800 you can upgrade the best part of all your system, I will break down your OP and offer some suggestions/guidance on each component, can you provide your present MB details please.
Window 64bit Premium = The appropriate OS when you have 8GB or more of Ram, if you replace the present MB unless you have the full retail OS disk you will need to budget for a new OS as an OEM version is tied to the original MB and is not transferable, is it 64-bit Vista or 64-bit W7?
Phenom II 945 3Gz = Not a bad processor but also not the best, knowing your MB details will help us to advise further.
AMD HD 4600 756mb (Fried) = Priority should be to establish why the card fried and whether any other components where affected.
I had 8 sticks, and 8gb memory. so 8x1gb Ram. = Again knowing the MB details will help us advise you better.
850gb 3/gbs = Good storage capacity but consider adding a SSD for the OS and some data, this will speed up your boot time and help you to secure important data by backing it up to a second HDD.
400 Watt. Decide upon all other new components before purchasing a new PSU, use a PSU calculator to ensure that you will have enough clean and stable power and that it has a minimum of an 80% efficiency rating; http://www2.corsair.com/psufinder/
I was thinking maybe up my PSU to a 600watt, get myself a 6850 2gb.
However should I go for the 6970 2gb which is 100$ more?
Should I upgrade my processor?
What should I look for in specs for cpu and gpu?
I know I need to look for the same socket but what else?
Do I really need 2gb memory for a gpu? is 1gb memory good enough?
The PSU I have advised upon above, a 2GB video card is overkill unless you intend using a screen larger than 30" or multiple screens.
Again the processor has been addressed above regarding your MB details I can say though that a good video card will be complimented by a good CPU, Ram, PSU and system cooling etc.
Post your MB details with your next reply and we can provide you with a list of components for consideration.