If you're sticking with 32bit then anything over 4GB is a waste as you won't be able to use anything over 3.x depending on your GPU RAM. Having done the upgrade for the sake of upgrading thing in the past I should probably try and explain the end result but i'd not have listened to me so I won't boar you. Win 7 contains both 32 and 64bit, buy retail it's cheap ish still on pre order, also vista didn't hog memory, it used it differently to XP.
Option One: Refresh existing PC
Add an SSD, this single act will transform your PC, you're booted quicker, apps load in an instant etc. Buy a 1TB drive vs the 500gb it's a minimal price difference for twice the storage. As it's unlikely a faster CPU will benefit you massively it's up to you if you want to spend the money but as pointed out check your board revision for 45nm support. Then add another 2-4GB depending on your chosen CPU route. A quiet/passive GPU cooler if the fan noise is an issue. On paper it will be dated as it's not going to be the latest socket type/DDR3 but in reality for your usage it will outperform option 2 and should come in a few hundred cheaper.
Option 2: OOO Shiney!!
Blow your full budget on DDR3/CPU/GPU/Smaller HD, no SSD and get a near identical spec but it'll be DDR3 and a newer socket type that you could upgrade in the same way i've suggested above. DDR2 - 3 is not a huge leap in real life performance. The down side is that it won't perform any quicker than option one for your stated usage and in 12 months it will be worth significantly less than you paid and be slower for general use than option 1 and you won't have a few hundred quid in your pocket to make you feel better.
Good luck with whatever you go with
Option One: Refresh existing PC
Add an SSD, this single act will transform your PC, you're booted quicker, apps load in an instant etc. Buy a 1TB drive vs the 500gb it's a minimal price difference for twice the storage. As it's unlikely a faster CPU will benefit you massively it's up to you if you want to spend the money but as pointed out check your board revision for 45nm support. Then add another 2-4GB depending on your chosen CPU route. A quiet/passive GPU cooler if the fan noise is an issue. On paper it will be dated as it's not going to be the latest socket type/DDR3 but in reality for your usage it will outperform option 2 and should come in a few hundred cheaper.
Option 2: OOO Shiney!!
Blow your full budget on DDR3/CPU/GPU/Smaller HD, no SSD and get a near identical spec but it'll be DDR3 and a newer socket type that you could upgrade in the same way i've suggested above. DDR2 - 3 is not a huge leap in real life performance. The down side is that it won't perform any quicker than option one for your stated usage and in 12 months it will be worth significantly less than you paid and be slower for general use than option 1 and you won't have a few hundred quid in your pocket to make you feel better.
Good luck with whatever you go with