(1) purchase another hard drive and use hardware mirroring for redundancy, pack as much RAM as you can in the box,
For heaven's sake, if you do that, then replace the power supply on that old box. A two year old, 350 watt, no-name power supply will probably start acting flakey if you add on to its load like that, delivering unreliable power and causing random, inscrutable, undiagnosable problems.
Yep, and if you're going to do that you might as well get a dedicated server box with redundant power supplies. Really, there are good reasons not to try to turn a workstation into a production server and that's one of them. I didn't mention upgrading the disk controller but most workstation controllers don't support RAID out of the box. And so it goes, nickel by nickel, until you might just as well have bought a server. And we haven't even addressed the backup issue.
(Along those lines I'm testing a half-terabyte USB external at the moment - the vendor swears they're not as flaky as they used to be. $250. It is fast. I don't know if it's reliable enough for business but I may just go out and buy one for me.)