(As far as I know) all Intel motherboards automatically shut down if the machine gets too hot, so you shouldn't have to worry about internal components melting.
The fan speeding up
is because everything's getting hotter, but that's normal; when you're just typing in Word or whatever it hardly needs to spin at all, as the computer is doing nothing. Just make sure none of the air vents are getting blocked, especially during demanding tasks.
With regards to the laptop's performance (or rather the lack of it), yeah, I would expect that lappy to be able to handle more. Update all your drivers, make sure there's no excess crap running in the background (viruses, spyware, and 'helper' applications in the SysTray).
Check if you've accidentally got a 'Super-graphics quality' box ticked in the CS settings also. CS is old, but it can still be demanding in certain configurations.
16-colour PNGs pwn.