Right now, the best software on the market for RAW processing are Adobe Photoshop/Lightroom, Apple Aperture, or PhaseOne (can't remember the name of the actual program).
I use Photoshop/Bridge to process all of my RAW images and am totally happy with it. I like it better than Aperture because I seem to get more shadow detail in Photoshop with my camera (I shoot a canon 20D and also process my bosses RAWs from him Canon 1ds MK2). I haven't worked with the PhaseOne software, but have heard that it is very comparable to Adobe's.
If you're planning on upgrading Photoshop, I would recomend waiting until May/June when they release CS3 (theres a Beta download available from Adobe, but I think you have to have a CS2 registration number to get it).
It may be worth upgrading from CS (the version you have) to CS2 and then from CS2 to CS3 when it comes out. That would cost you approx. $300 as opposed to $600 for the full CS3 version. I could be off on the prices, but check BHPhoto.com for upgrade version prices. CS3 should be the same price to upgrade as CS2 when it comes out.
As far as JPEG vs. RAW goes, it all depends on how you're going to be using the images. If all you want is some nice prints 8x10 or smaller and won't be trying to sell any of your images, then JPEG is probably fine. That's not to say that you couldn't print/sell a JPEG image, you just get a lot more conrol and a lot more fine detail when you shoot in RAW. You'll also be able to shoot a lot more images per card and, depending on your camera, you'll be able to shoot more consecutive shots in burst mode than with RAW as well.
That being said, if you don't mind spending a lot more time processing you photos, having fewer images per card and a smaller shot buffer in burst mode, then RAW is 10x more versatile than JPEG. I've made 20x30 inch prints from my 20D with the help of some plug-in noise and upsizing software in photoshop (noise ninja and blow up if anyone really wants to know), which would not be possible if I had shot the images in JPEG. I could get a lot more in detail about it, but my post would be pages. If you're really interested in the subject, look through www.luminous-landscape.com
. There's a couple articles on the subject over there. Hope this helps. Feel free to PM me if you've got more questions.