A few thoughts on optimization.
I am definitely no expert (hopefully others can correct this info if it is wrong) but after wrestling with a compaq p4 3.2ghz xp machine with Live 6LE, I came up with the following levels of optimization, all of which helped tremendously:
At a foundational level, the three things that made the biggest difference to performance was Ram, Hard Drive and a clean Vanilla install of XP. 512Mb of Ram simply is not enough, even though the official spec's said it was. Ram is cheap or even free if you are in the know. I upgraded to 2 Gig.
The Hard drive in my machine was a 4000rpm PATA drive. A very good free little application is HD Tach
Download it and use it to check the spec's and performance of both of your hard drives. It will tell you the speed and the data transfer rate. Compare the spec's between your system HD and Ext HD. Remember these are average rates. I upgraded to 5400rpm, and would have gone to 7200 rpm if I could have found one.
If you can find someone to help you install a fresh Vanilla copy of XP, you will have a good chance of getting rid of unwanted software conflicts. You will have to find drivers for your video card (I had someone do this for me so I don't know what else driver wise). This made a big difference for my machine.
Depending on the above and how much is already in place, the next level of attention is how your machine uses its resources. You can get a visual look at this by downloading and running this DPC Latency Checker
Its a free application. Spend a decent amount of time with this. I found with my machine that red spikes occurred on a regular basis every 10 min or so. Red spikes are not your friend. Now you can think about disabling a few things. Right click My Computer>Properties>Hardware Tab> Device Manager. You will see a list of devices your computer uses. Some of them can be disabled permanently like the Floppy disk controller and the LTP printer port, and some on an as needed basis like your CD/DVD drive, wireless internet card etc, and then double check the DPC Latency tool. The two that made the biggest difference for my machine was the CD/DVD drive and the wireless card.
Try googling 'Optimizing Win XP for Audio'. You will find a number of articles to read that will also offer other optimizing tips, if you feel you need to go to a deeper level.
The next level of optimization is at a software level. What other things do you have going when you are using Live? Basically turn off as much as you can, such as Antivirus, and anything you have set to run automatically at any point.
I also recommend Using Ultimate Defrag
This product, I have the paid version which gives you 10 licenses, allows you to strategically place Programs and Audio files toward the outside of your Hard Drive, and your non audio stuff like images and less used programs towards the inside. There is a performance gain to be had ( although you will find some who disagree).
Also DL this CCleaner
free application and use it on a regular basis (both the cleaner and registry application) to 'clean' your machine. You can also use it to disable applications that load on start up. This is a good way to make sure as much of your system is available for use as possible.
A couple of other things to consider is if your video card uses system RAM. It most likely does. In this case, it might be possible to change the amount of RAM being used. This is usually done in the BIOS settings. My p4 machine can go from 16mb to 128mb. Its a great way to maximize the ram you have available for system crunching. Also, some p4's have hyper threading technology, and there are recommendations that disabling this will help. Unfortunately my machine does not allow me to do this.
The good thing about working through all of these things is that it will help you understand your equipment better, and give you a good understanding as to why you may need to make changes or decide to upgrade. Even though I do not use Live on this machine anymore, it still runs fantastic (its my Sony Acid machine).
Keep your machine as lean as possible. Hopefully others will chime in if I have misled you or missed something out.
Cheers and all the best.