Did you try a clean install of XP, assuming your system has more than what Microsoft claims are the minimum requirements (double for memory)? In any case, you need a boot disk to re-partition and re-format your drive. In Win 98, there is a Startup Disk tab in the Add/Remove Program applet in the Control Panel; it may be in a similar location in ME. If not, search windows help, or; http://www.bootdisk.com
If you could use a hard drive upgrade anyway, it can be handy to install 98/XP on a new drive, and leave your current one as a slave, until you have everything installed / setup and tweaked in the new OS. This would be easier than backing up everything and then restoring your data, and if you run into a problem, forget a password, etc. you can change a couple jumpers / cables and boot into ME.
A clean install of ME would probably help also (not that I am a fan of the OS), since it really shouldn't get sluggish after a couple hours. You might want to test the computer out for awhile after installing an OS to make sure it is running OK, then re-install one (or a few) programs at a time, so that if the computer starts doing it again, you have a good idea what the culprit is.
PC911 > How-To > Windows > Clean-installing Windows
(Google's first result, looks good from a quick once-over)http://www.pcnineoneone.com/howto/clean1.html