Your pc should be OK for standard definition editing, either using DV avi source material from a mini DV camcorder, or perhaps mpeg2 source clips from a hard drive camcorder.
At a pinch, it would also be capable of editing HDV footage, although it would take a long time to convert that to AVCHD - and then would not be powerful enough to actually play the AVCHD video.
Assuming you're using Windows XP, 1 Gb of RAM is fine. You won't see any improvement of transcoding speed with more RAM - e.g. when converting dv avi to DVD compatible mpeg2. You will see a slight benefit when Smart Rendering files however. If your source material is in fact mpeg2 footage from a hard drive camcorder, it might result in a significant improvement in the time it takes your pc to render a project.
There are a couple of things to bear in mind, however. Whilst DDR2 RAM is dirt cheap right now, I suspect your pc, like my old P4 desktop pc, uses DDR RAM. That isn't so cheap, though you can sometimes find it offered on eBay at reasonable prices.
Secondly, I wonder how many RAM slots your pc has. If you have four slots, that's fine, but if you only have two slots, and they're currently occupied by two existing 512Mb RAM modules, you'll have to junk one or both of them if you want to upgrade your RAM.
I would definitely recommend you get another hard drive. Almost all "Tier one" pcs from manufacturers such as HP, Dell, Gateway etc have a space for you to fit an additional hard drive, and HP's even sometimes have the spare bolts "parked up" on the chassis.
I always keep my operating system and programs separate from my data, but as you mention, there is also a definite speed advantage in some situations when using another hard drive.
If you Smart Render a dv avi clip, which you may do if you're in the habit of saving trimmed clips to a new file, for example, you will find that the Smart Render happens much more quickly when the source clip is on one physical hard drive and is saved to a second hard drive. There is still some benefit from doing the same thing when Smart Rendering standard definition mpeg2 files, but it is not so great.
Note however that to take advantage of this speed increase you would need to have your source clips on one hard drive, and set the output to go to the other drive. If you simply moved everything to do with Video Studio to the second drive, you would not get the speed increase.
The chances are that your motherboard has some Sata ports (sockets) So you will have a choice of getting either an IDE hard drive or a SATA drive. SATA drives have the benefit of slightly higher transfer speeds, and use a much less bulky connector cable. You may have to buy a SATA cable separately, however, since one may not come with a SATA hard drive. Whatever you do, don't buy such a cable at your local "big box" electronics store, since they seem to make most of their profits from inflated accessory prices!
If your pc already has an IDE hard drive, your existing IDE cable will have a "SLAVE" socket on it that a second IDE hard drive can plug into.
You may be able to optimise your pc to run a little faster. Check out Steve Jones' threads on setting up a video editing hardware profile, again possible if you are using windows XP.
http://phpbb.ulead.com.tw/EN/viewtopic.php?t=13950
You might not see a huge benefit on a Pentium 4 pc which uses Hyper Threading, but not running your antivirus program may give you a noticeable speed boost.
You should also use the Windows disc cleanup utility to clear out any "fluff" that builds up, and then run the disc defragmenter. Once in a while, it's also important to run chkdsk to make sure there are no bad sectors on your hard drive. In normal usage, Windows, in all it's varieties, has a nasty habit of gradually slowing down unless you actively work to keep things clear.