Premiere Elements and Photoshop Elements are more processor intensive than graphics card intensive, Jansi. You don't say how fast your processor is, but it's likely at least 5 years old and, depending on what types of video you're editing, you're likely at the lower end of the program's minimum hardware needs.
Adding a new graphics card won't make much difference -- although, in later versions of the program, if you've got a 128 meg card with pixel shading abilities, you'll be able to access a few higher end effects and transitions.
As for upgrading to version 7, it's generally more about features than performance. Here is a list of the new features available in version 7, from the FAQs to the right of this forum.
As Steve points out, there are but a very few GPU Transitions and Effects, that will benefit from a higher-end video card. Now, Photoshop (the big one), does have some video support for video cards with CUDA, but those benefits are rather small compared to the additional cost of such cards.
To give you some idea of the cost vs performance trade-off, I have a workstation with a US$2000 video card and a laptop with an upper-mid level consumer video card. I run Photoshop (earlier without the CS4 CUDA support) and PrPro on both machines. There is zero difference between these two video cards with regards to PS and PrPro. The only place that I can see any difference in performance is with 3D work. Neither PS, or PrPro really support much in the way of 3D, other than some faux 3D Effects and Transitions. Even with those, both cards perform exactly the same, so far as I can tell.
With regards to upgrading the versions of PSE and PrE, I'm with Steve - it is about the newer features, some support for newer formats and CODEC's, but the performance difference will be through your CPU and your I/O sub-system, i.e. your system's HDD's, their speed, size and how they are allocated in your system.
Note that the GUI has changed in PrE, as of PrE 4, from what you had. There will be some obvious differences, when you first launch PrE 7. Steve has a good book on PrE 7, and since he wrote the book on PrE 2, knows these differences well. PrE 7 will seem like an old friend, but one sporting a new "look." His book on PrE 7 will really help you get used to that new look.
I do have Steve's book for PrEl2 so if I would go to PrEl 7 I would definetely buy Steve's book for that version.
The Computer I bought for 4-5 years ago for video editing when I bought PreEl 2 (After years of hassling with different versions of Pinnacle studio - with which I have had a lot of problem when making a DVD). PrEl 2 is working good with my DV footage and I have seldom had problems with PrEl2.
My problem is more that the P4 computer with XP need to be replaced and then I probably will move to Vista/WIn7 - but then PrEL2 may not work?
So I plan to buy a new motherboard and processor for another PC I have - and if I understand you comments I could even start with the graphics on the motherboeard to begin with - and rather spend money on a faster processor.
I have now 2 harddrives with SATA which I think is minimum when editing since I/O is less of a problem compared to using one HD.
(although I would like to have SSD as harddrive - but they are expensive still)
What about RAM memory - would I benifit of using 64bit Windows and more RAM? (I would add 3-4GB as minimum but with 64 bit maybe up to 8GB)
do you think PrEl2 would work in vista 64 bit/ Win 7 64bit?
I would not recommend using any version prior to 3.02 on Vista or Windows 7. You'll also not get a significant boost going to a 64-bit operating system, since the program is 32-bit and the operating system would down-shift to 32-bit compatibility mode anyway.
I always recommend buying a new computer rather than merely upgrading a motherboard, etc. For one thing, the technology for computers has improved so much as a whole that replacing with some faster parts sometimes just leads to bottlenecks at the slower parts. Besides, replacement of a computer is so much better of a value! The kind of desktop you can get now for as little as $800 is amazing!
In addition to Steve's tips above, here are some thoughts on your proposal:
1.) graphics card vs chip - most intel on-board graphics chips are minimal at best. I'd suggest going with an inexpensive card, and probably a lower-end ATI. I use more nVidia cards on my systems, but lately people have been having all sorts of issues, especially with the recent nVidia drivers. Guess that I am just lucky. At the same time, ATI's are getting high marks.
2.) your I/O is very important, as you state. I feel that 2 physical (no partitions!) HDD's is the minimum and three will be even better. As for SSD, I feel the price vs performance is still not even close. Maybe next generation (next week - next month - next year?), but not yet. Though a RAID configuration will likely be faster (depends on how one sets up their array), I would advise against using one for the system HDD. I would only consider them for media discs if one did any configuration ending in 0, i.e. 0, 30, 50.
3.) as for RAM, and taking Steve's comments to heart, I'd stick with XP, or Vista 32-bit for the OS, so you will be limited to 4GB RAM, knowing that your OS will only be able to use ~ 3.4GB of that. Depending on the application, the rest might not be totally wasted, but you will get that >3GB usage, and that would be worth it to me, even if ~ 0.6GB goes to "waste." All of my machines are running XP-Pro 32-bit w/ 4GB RAM. Some with the 3GB switch, and some without it.
4.) if you do go with the new MoBo, CPU and say 3x HDD's, pay close attention to your PSU (Power Suppy), and make sure that it can handle the new CPU, plus any/all HDD's. This is often overlooked, when one is upgrading.