Your picture files are too big. From your project preset I assume you plan to output to an NTSC DVD. Such a DVD has dimensions of 720x480.
If your slideshow is a straight forward timeline of images then you should convert your photos to 720x480 before importing to PRE9. Your PSE7 (or any other photo editing software) can do do this. If you want to uses pan & zoom then resize to no more than 1000x750. A lot more detail can be found in What resolution should my photos be in Premiere Elements?
Note that, for video, dpi is meaningless.
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Along with Neale's suggestions, I would also explore your Windows Virtual Memory (Page File). This ARTICLE will give you some background and tips.
For Scaling still images with automation, this ARTICLE will give you tips. Note: the PSE steps were graciously added by Neale.
Last, take a look at this ARTICLE, as Windows Indexing can cause all sorts of issues. I do not think that the behavior, that you describe, will lead to Windows Indexing, but having it in the back of your mind, as you troubleshoot, is not a bad thing.
I am editing a feature film, I have 40 mins cut together already, and began running into this "low system memory" problem. I do not want to loose what I have on my timeline, should I disable the indexing feature as described in this article?
Also, my raw footage is from an external hard drive.
Below is a snap shot of my system specs.
First, do both a Save_As (increment your Project's name), then do a Save_As_a_Copy. I would Copy that copy to the external, for safe keeping.
Win7 has a better Windows Indexing system, than prior versions, so I do not know how much difference that will make. The 8GB RAM can likely be easily, and inexpensively bumped up to 16GB (make sure to match any RAM 100%). I would also take a look at this article: http://forums.adobe.com/message/2910195#2910195 and look into removing any unnecessary running programs, while you edit.
Take a look at your Windows Virtual Memory Page File, and see how it's managed, plus the size (if dynamically managed, then Min and Max). Allocating more HDD space to the Page File, if you have the HDD space. For a video-editing rig, I like to statically manage my Page File, and set it up, when I first install the OS, before the HDD's get filled to any level. Again, Win7 is better with the Page File, and with a 64-bit OS, if one has the installed RAM, then the Page File will see less use, than with 32-bit OS's.
Also, remember to render your project as you work!!!! (Press the Enter key.)
In Expert View, the indication that you need to render your timeline will be a yellow line along the top of the timeline.
The vast majority of low memory issues are the result of working with too much of your timeline unrendered.