I recently spent just over £120 to upgrade my main retouching workstation from 2GB of memory to 4GB. Photoshop running on Windows XP can only use 2GB of memory directly (see below) but the remaining ram can and is used by the operating system as a cache for disk writes.
I did try turning some of the system ram into a virtual disk in order to set it as a Photoshop scratch disk but got identical timings to when I just left the operating system to manage the memory.
Photoshop is faster now when handling large files, filters such as lens blur appear much quicker than before. Worth the money spent.
There is an option when running XP to set a special /3GB switch in the boot.ini that enables windows to allocate 3GB of ram for applications. I managed to get this working (you need to add a command line switch to account for the memory allocation of your video card). However I found that my timings were not as good as the timmings I acheived before using the switch so I abbandoned it.