Personally would recommend the fastest processor you can afford - first - especially for encoding tasks - this you'll never regret
For the RAM - you can get after market 2GB kits for less than the upgrade from 1 to 2 GB from Apple. Would start there and watch your RAM usage. If you are pretty consistently using 80% +, then would opt for another 2GB kit. Think at 4GB, this should handle pretty much anything you throw at it with negligible gains with any more than this.
Don't have a Mac Pro and am new to Apple so I don't know how you set this up, so am speaking from just a plain hardware enthusiast perspective here. Would set up a system disk for your OS, and then a RAID 0 with a couple of drives that would be used for your video work. And of course, separate drive(s) for back up would probably be pretty important for you.
Of course, unless you have plenty of $$ you have to weigh the options between the processors and proper hard drive set ups. Just remember - processor is expensive upgrade option down the road and you then have one sitting around or having to try to e-bay it, while RAM and hard drives are pretty cheap upgrades down the road.