I guess nobody here is familiar with ME. Maybe you could try an ME forum. There is one at annoyances.org.
Yes, you would be better off running XP, but you mentioned you plan on buying a new computer. That would probably come with XP or Vista installed so whether it would be a good idea to buy XP for your current machine depends on how long you will be using it.
I can only offer advice on your current situation based on my experience with XP and previous versions of NT.
There are two things that will slow up your machine. A screwed up or malevolent process that is consuming a lot of CPU cycles, or is using up your memory.
XP's task manager will show how busy the CPU is. When you are doing nothing, the CPU busy should be in the range of 0 to 10 percent with occasional swings higher. XP's task manager will show the amount of CPU time being used by each process, so it is easy to see which one is causing problems. As long as the total CPU utilization is less than around 50%, it should respond quickly to keyboard or mouse input.
If you have a program hogging the CPU or memory it could be malware or just a poorly written program. I found that if I left I.E. running for a few days it would use all the CPU it could get for no apparent reason. I then found it wasn't I.E. itself but rather it was an add-on. I.E. 7 puts a shortcut in Accessories > System Tools, that will run it without add-ons.
Figuring out memory utilization is more puzzling to me but I can usually figure it out from Task Manager, or sometimes I use SysInternal's Process Explorer. I rarely have problem with running out of memory, but I have more memory than you do.
If ME's Task Manager is lacking what you need to monitor your computer, you might want to try things like Process Explorer from SysInternals. It apparently can run on ME. The SysInternals stuff is high quality. I see now that Microsoft bought the company in July 2006.
http://www.microsoft.com/technet/sysinternals/default.mspx
I have a hell of a lot of processes running, but my CPU utilization is low so my machine works well. A lot of these processes are McAfee. If I click on "CPU" in taskManager, it will sort the processes by CPU utilization. The System Idle Process is unique. It runs when the CPU has nothing to do, so having it use 98% of the CPU is good.