Mary Fran,
If XP is wanting to go out and get service pack 2, I'd just set aside some time to do that before you start scrapping.
Check out
http://v4.windowsupdate.microsoft.com/en/default.asp it will help you find what updates you might need. Personally I'd get SP2 just to get XP to stop complaining.
If really doesn't sound like you're too many programs. I often am running everything you mentioned along with a second IM and music and I don't see a performance hit using PSE. I'd run checks for spyware and viruses/trojan horses just to make sure that neither of these things are sucking up your memory.
The next time things get slow in PS just check the Memory usage and see what has grabbed the largest amount of memory.
Good luck!