You will get better performance with a quad-core processor, more than 4GB of RAM, a 64-bit OS and use the 64-bit version of CS5. You can also adjust the allocation of RAM, scratch disk space, and caching in Photoshop's preferences to get better performance. The Xeon might be overkill, but wouldn't hurt either. i5 or i7 would be ideal. 8GB of RAM is also ideal and an SSD will help load time on your computer all around. But if you don't use a 64-bit OS and 64-bit version of Photoshop, you'll still only get the use of less than 4GB of RAM. Upgrading to CS6 without getting 64-bit won't improve anything. It might even be slower.
First thing I can think of is upgrading the CPU, since it sounds like a processing thing, and a Core2Duo is pretty limiting. Xeon may be overkill though
I doubt the SSD will make Illustrator perform any faster, all it will do is load quicker. Which isn't a bad thing in its own right. Upgrading the RAM also won't help Illustrator in this case, but if your OS is 64-bit then you could definitely consider it.