For certain things, equipment can put a limitation on what you can do, but there is nothing to stop you from taking beautiful pictures with the camera that you have. You may not be able to make 16x20 prints or crop out the center 20% of the image, but you should get very nice 8x10 prints if you use practically the whole frame.
It's more important to BE THERE and take the picture than to have the "ultimate" camera.
Now... If you DO want to step up, a Nikon D40 is a great choice. It's well under $500 for the body and lens, too.
If that's too much for you, look into a point and shoot with a larger sensor for some improvement in image quality.
Some large sensor point and shoot cameras include:
(October 2008)
Canon Powershot G9 and G10
Canon Powershot SD950IS and SD 990IS
Fujifilm FinePix F60fd
Fujifilm FinePix F100fd
Kodak Z1085 IS
Kodak Z1285
Leica D-LUX 4
Nikon Coolpix P6000
Nikon Coolpix P5100
Panasonic Lumix DMC-FX150
Panasonic Lumix DMC-LX3
Pentax Optio A40
Sigma DP2
Sony DSC-W300