Given your intended use and budget I would probably focus on the following specs:
2+ Ghz CPU
2GB RAM
15.4" screen
100+GB drive
extended life battery
DVD-R
Extended Warranty
The processor is the heart of the machine, so you don't want to skimp on that but you can easily blow your budget if you are not careful on this part.
Photoshop loves RAM, but XP has a limitation of 3GB and most people would have room to spare with 2GB.
15.4" screen is the "average" screen size these days. You can go to a 17" or even a 20" but its going to be quite a bit bugger, heavier and likely would consume power faster. A good video card is important though, since you have some desire to play games. A lot of notebook video cards are either crap or "workstation" cards like a Quadro. Let us know what you are looking at and we can tell you the viability for gaming.
Hard drives are like money. No matter how much you have you will want more eventually, but you learn to live with what you have. I would not spend to much going over 100GB myself.
Obviously with a notebook you want it to be portable and useful when you are away and battery life is the key to this. You can go nuts and spend a ton of cash and add a bunch of weight and get 6+ hours of battery life, but I would probably focus on one step above stock to get some decent run time without adding too much extra weight.
A DVD-R or even a CD-R/DVD will allow you to burn disks. CD and DVD media are both cheap enough now that one does not really win over the other, but CDs are more portable. Not everyone will have a DVD player in their system these days but MOST probably will so I would not let this be a deal breaker. consider a CD-R the minimum and take what is offered at that level or above.
I would consider some kind of on-site warranty for at least the first year, and more if its economically feasible. Being portable, Laptops are subject to more wear and tear than a desktop and since it is an investment its good to know its covered.
A docking station is like a "home base" for your laptop. You can plug in a full size keyboard, mouse and monitor into a docking station and leave it on your desk. When you are at home, your laptop plugs in to the docking station so it can charge and you can use it like you would a full size desktop. When you are ready to take it to class or whatever you just unplug it from the dock and take the laptop with you.
Let me see what I can find for deals to give you an idea of what your budget will get you. Keep in mind there are often "back to school" sales going on about the time you are looking to buy, so anything quoted today is just a snapshot of what you could get today.
Here is an HP dv6700t for under $952.98
* Genuine Windows Vista Home Premium with Service Pack 1 (32-bit)
* Intel(R) Core(TM)2 Duo Processor T5850 (2.16GHz)
* 15.4" diagonal WXGA High-Definition HP BrightView Widescreen Display (1280 x 800)
* FREE Upgrade to 2GB DDR2 System Memory (2 Dimm)
* 256MB NVIDIA GeForce 8400M GS - For Core 2 Duo Processors
* HP Imprint Finish (Radiance) + Microphone
* 802.11b/g WLAN
* FREE Upgrade to 160GB 5400RPM SATA Hard Drive from 120GB 5400RPM SATA Hard Drive!!
* SuperMulti 8X DVD+/-R/RW with Double Layer Support
* No TV Tuner w/remote control
* High Capacity 6 Cell Lithium Ion Battery
* Microsoft(R) Works 9.0
* 1-year HP Accidental Damage Protection with HP Pick Up and Return
These are of course just my opinion and I am sure 10 people are lining up to offer you 11 more

but we are here to help you zero in on what exactly you want.