Dual boot XP (possibly one from external drive)

I'll try to keep this as short as possible, but I have a number of questions:

Background: About four months ago I laid splurged and purchased myself a new system designed specifically for video editing. Very briefly, the specs are as follows: ASUS P5WDH delux, Intel Core2Duo E6400, 2GB RAM, 2X WD 250GB HDs (one system, one for media), GeForce 7300... I have probably forgotten something, but suffice to say that within the budget I could affort this machine was fantastic. I am running Premiere Pro 2.0 for video editing, along with After Effects, Encore DVD, and some other video software.

When this was a brand new install it was incredible. Editing was like a dream -- everything in real time, no crashes... perfect. Unfortunately, I don't have the space or cash to dedicate this machine entirely to editing. Instead it has all sorts of MS Office apps for my wife, internet downloads and games from my kids, etc. etc. Four months later and it is still pretty good, but editing is becomming noticably slower. This even with regular scans, ccleaner and more.

So, what I am considering now is making this a dual-boot XP install. One dedicated entirely to my video editing apps and the other to all the rest of the kids and wife's apps.

My questions are at several levels:

1. Will this actually help? To the best of my understanding it should be the next best thing to a dedicated machine, but I need to know whether this will do the trick for me.

2. What is the best method? I really don't want to have to remove and reinstall everything that is already on the machine, and for a couple of reasons don't want to put in another internal drive, so should I:

i. Partition my current system drive (if so, what tool is best for doing this) and put the new bootable XP on it,
ii. Set up an e-SATA external drive (if so, how to do this please?)
iii. Can I use an external USB or Firewire drive for a second XP boot?

3. Finally, once I decide what to do, HOW do I set it up? I'm quite comfortable with editing my registry, etc., but I'm far from being a computer God. I definitely need some guidance or at least to be pointed in the right direction before I start going down this route.

OK, that is it for now. Thanks for getting through all of my questions and thankyou in advance for the assistance.