One thing to remember is that just because your system has free memory does not mean that FCP is not running out of memory – there is a limit to how much it can use regardless of how many gigs you have installed. (2 gigs is it?)
It’s important to make sure that your projects stay small. Everything in your project takes space – don’t have anything in there that you don’t need. If you have a lot of old versions of your sequences keep them in a secondary project. If there is stuff like stock shots or stock music that you can get right from the finder don’t keep it in the project.
It does sound like your drives are too slow… but that doesn’t explain the out of memory problem.. your projects may be bloated too.. keep them slim if you can.