True i own Warcraft 3 rain of chaos and Frozon throne but NEVER heared of a game called Starcraft, i know this "person" starcraft hear on VG but didnt know there was a game, let alone a franchise of it.

Since you mention warcraft i can only assume its a Blizzard game?

There is simply no way you aren't playing dumb right now :p

Someone challenged me on another forum to come up with a PC that runs Fallout 3 better than PS3/360 for less than $500.

Too easy, I said.  Let's make this interesting, I'll make it for $350, cheaper than the triple.

I present to you a PC that can play Fallout 3 better than PS3/360, for less than PS3.  

Motherboard + E5200 CPU $95 (tax + shipping included)
http://forums.slickdeals.net/showthread.php?threadid=1267467

7.1 HD audio (integrated)

Radeon 4830 $90
http://www.newegg.com/Product/Product.aspx?Item=N82E16814102822&nm_mc=OTC-Froogle&cm_mmc=OTC-Froogle-_-Video+Cards-_-Sapphire+Technology+Limited-_-14102822

2GB 800mhz ram $20
http://www.newegg.com/Product/Product.aspx?Item=N82E16820134909

80GB HDD $33
http://www.newegg.com/Product/Product.aspx?Item=N82E16822145127

DVD-ROM $17
http://www.newegg.com/Product/Product.aspx?Item=N82E16827136159

Case + 420w power supply 
$30
http://www.newegg.com/Product/Product.aspx?Item=N82E16811162044

Monitor $0 (hook it up to your existing HDTV, makes a good media center too, torrent a few 1080p movies for me)

Windows XP $55
http://computers.shop.ebay.com/items/Software__windows-xp_W0QQCategoryZOperatingQ2520SystemsQQQ5ftrkparmsZ72Q253A1234Q257C66Q253A2Q257C65Q253A12Q257C39Q253A1QQ_catrefZ1QQ_dmptZUSQ5fSoftwareQQ_sacatZ18793QQ_trksidZp3286Q2ec0Q2em14QQ_sopZ15QQ_scZ1

Keyboard $5
http://www.newegg.com/Product/Product.aspx?Item=N82E16823107134

Mouse $5
http://www.newegg.com/Product/Product.aspx?Item=N82E16826193002

Total = $350

Performance
This PC will run Fallout 3 far better than any console. Evidence:
http://www.eurogamer.net/articles/fallout-3-triple-format-face-off-article

Allow me to establish that this PC is roughly the same, if not superior to, the Eurogamer testbed. Some of the Eurogamer parts are out of production, so I had to find equivalents. The RAM is identical, the OS is identical, the HDD is identical. Eurogamer used a Q6600 CPU, while this build uses a E5200 CPU. Since Fallout 3 does not recognize quad core, the dual core E5200 is identical in performance as far as Oblivion engine games are concerned, as evidenced in the above article.
However, if you do a simple overlock (E5200 is a dream for overclocking even with the stock heatsink), then the E5200 is far superior. Also, Eurogamer uses an older Nvidia 8800GT, which is no longer in production, so I use the newer ATI HD 4830 which is a direct (and superior, in my opinion) competitor to the 8800GT's replacement, the 9800GT. 
(http://www.neoseeker.com/Articles/Hardware/Reviews/msi9800gt/)
Results:
PC runs at higher resolution, higher framerates, and more graphic details than either console. From the Eurogamer comparison,

"Moving away from console, the real revelation is just how good the PC version is, and how well the game performs with relatively meagre hardware. Swapping in a dual-core CPU instead of the quad didn't impact performance massively and with the 8800GT or equivalent weighing in at GBP 90 or so at the time of writing, upgrading a modern-ish desktop or media centre PC to double up as a games machine is a hugely tempting proposition, especially with a game as special as this. Speaking as someone without day-to-day experience of PC gaming, Fallout 3 is a wonderful affirmation that computer gaming is still as strong a proposition as ever it was..."

So there you have it. A $350 PC runs Fallout 3 better than a $399 PS3.  Or a 360 for that matter.

NOTES:
The $33 80GB hdd is ridiculous, since these days you can get 1TB for $90, or 250GB for $44, but my goal here is cost and beating PS3, if you're going to buy this please think about upgrading the HDD for $10.

Use parts from your old PCs to save money, like the DVD drive, case, HDD, or an old copy of Windows XP. Heck, skip out on the DVD drive altogether, install XP via a USB drive and use Steam to buy games. You can get this rig for about $250 with a bit of creativity.

Instructions on how to build a PC are here:
http://techreport.com/articles.x/13671

The build I use for my own PCs as well as my familys (not for a ps3 beating contest) is here:
http://techreport.com/articles.x/16438/2
It's a bit more expensive, but it keeps upgrades in mind, and the parts are certainly better.  I recommend it far above the one used for this challenge.

What if I wanted to play a game that came out next year? Would I have to spend another $200 updating this PC?

It be like saying you never heard of Halo, Half Life, CounterStrike, Final Fantasy, and Diablo..

or it would be like saying you never heard of chocolate ice cream, Canada, Paris, Disney, Coca Cola, etc...

I'm actually quite shocked someone on this site doesn't know what Starcraft is..