Upgrading RAM vs Upgrading CPU with RAM

Hi Experts,

I am thinking upgrading my home PC(Windows XP pro) and this is the spec:
Pentinum4 2.6G with 1G ram(DDR) (By the way, I found out that DDR is more expensive than DDR2.)
100G Hard drive(7200rpm)
Deluxe Asus p4p 800 mother board

I do not play any game, but I do some graphic works occasionally and I use photo shop.
I also usually run more than 10 applications (MS office, a few different browsers, graphics tools and etc&.). My current system is ok, but not excellent. I want a bit faster responding time and I want to work a bit faster pace. Another issue is that I keep my PC running all the time and if I, for example, open photoshop and next day photoshop gets really slow, so I usually have to restart the application.

It looks like I have two options:

1.      Just upgrading ram (DDR) to 3 or 4 G
2.      Spend more money and do some major upgrading with mother board, CPU(Intel core 2 duo/quad/extreme) and ram (this will be nice, but of course it costs money.)

My questions are:

1.
I do some graphic works, but nothing really serious works and I just want to run everything a bit faster pace. Just upgrading ram will meet my expectation? Or do I need some major upgrades?

2.
I do not want to spend whole a lot of money on this, so what can I do if my budget is around $350?

3.
Hard drive with sata will affect a lot in term of performance compare with IDE hard drive?

Thanks,