The problem still exists even when transmission is off. I've even tried Safari instead of firefox.
Jason, I know the problem you're talking about, as I experience it myself, and the culprit is Parallels -- rather, Parallels under certain conditions.
I have a 2006 first-gen Core Duo MBP with "only" 2GB of RAM, and I myself have experienced the same kind of slowness where, as you note, it's impossible to even type a web address into a browser without beachballing.
Here's what I've found from experience: the caching mechanism for web browsers (moreso Safari than Firefox, but it affects both) is in direct conflict with Parallels. When Parallels is running, it's possible to use Firefox in the Windows VM at a normal speed, whereas using Firefox on the Mac side will be slow. Try it; I'd be surprised if you don't get the same result.
Don't forget that Photoshop reserves a large chunk of drive space for "scratch" usage, so that also plays into it. In effect, you have three things competeing for disk usage, causing the lockdown: Parallels, with its virtual memory, OS X, with its page file, and Photoshop, with its scratch file.
Here's what you should do to alleviate the problem:
1. If you can, upgrade to Photoshop CS4. It's faster. Whether you can get the latest Photoshop or not, try to plug in an external drive and set Photoshop in its preferences to use that external drive as the scratch disk. This will immediately free up resources.
2. You don't mention which Parallels version you are using. If you're stuck on Parallels 3, try to upgrade to Parallels 4 -- it introduces a feature called the Adaptive Hypervisor, which switches the CPU attention between Windows and OS X depending on which one you are using at the moment. Even beyond that, Parallels 4 is WAY more optimized and faster than Parallels 3 -- up to 20% or more.
3. As others have noted, get the RAM you give Windows down to 512MB. Giving something as softcore as Quickbooks 1.5GB is ludicrous. Also try telling Parallels to prioritize OS X, and not Windows. Alternatively, find a QuickBooks alternative or equivalent that's OS X native.
4. Use a utility like Drive Genius or Tech Tool Pro to defragment your drive. Yes, the HFS file system used by Macs defrags smaller files in real time, but things will still get fragmented. Also use Parallels Compressor to consolidate and defragment your virtual machine file.
5. Empty your caches in all your Mac browsers before you start Parallels, and always start Parallels after a fresh restart before you start any other app. That will load things into memory in the most efficient manner.
These tips should help. Let me know how it goes!