TheOtis
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Option 3 is out, because there isn't a significant difference between the two. If you want to see a difference, than you would go for the Q6600, which is out of your budget.
The Western Digital 750GB hard drives I've heard, are comparable to the Raptor's speed, and you get a ton of more space.
Newegg.com - Western Digital Caviar SE16 WD7500AAKS 750GB 7200 RPM 16MB Cache SATA 3.0Gb/s Hard Drive - OEM
More doesn't mean the apps will be faster. And he'd have to get a 64-bit Windows, to handle more than 2GB of RAM.
I was under the impression Windows Vista 32-Bit can support up to 3.2ish gigs of RAM.