For that money I'd build an AMD-based system, not a C2D.
Look for at least an Athlon64 3700+ or higher, X2 if it's not needlessly more expensive, as they tend to be. Then choose motherboard depending on socket type of the CPU: either AM2 or s939. Both are fine, you're not going to upgrade on that technology anyway, just make sure the CPU and mobo sockets match. If S939 CPU then S939 mobo, If AM2 CPU then AM2 mobo. Hope I make myself clear.
Ok now if it's S939 look for 2x512MB of DDR400, if it's AM2, 2x512 DDR2-667. On the opposite of what you say I don't think you will benefit so much from 2GB of RAM in photoshop, except if you start loading hundreds of photos at the same time. If you really want to build a computer and optimize it for Photoshop then plan a Core 2 Duo system because the processor will be the main factor. Then you won't have much money left on video card. But I think the AMD - 1GB of RAM - good video card system is the best overall performance you can get out of 700$.
Antec Sonata II case is fine, no need for another PSU the integrated one is good.
Hard Drive: you want a Seagate Barracuda SATA HD, size is to your liking, ideally 250GB or 320GB.
Now you should easily have some good room left for a video card; depending on how much: 7600GT < 7900GS < X1950Pro < X1950XT