You'll probably have to replace that PSU to be on the safe side.
EDIT: looking at it, I'd deffinately replace it if you want to go to a 8800gts
And no 939 motherboard used ddr2
afaik probably best to stick with the memory you've got unless you can find some very cheap 1gb ddr (unlikely)
Also unless you go for vista 64bit then extra system ram is going to be nothing, 2gb is fine esp as you have no spare slots.
No it's not, given a choise between a 8500gt 512 or a 8500gt 256 & £20 quid change I know which I'd go for.