I have noticed that the computer business has slowed down recently, it doesnt seem that there is as much progress being made as there has been in the past...Is this because there is less of a demand for a faster processor, or are they reaching the boundaries of current technology?

What is happening now is, the processor compainies are slowing down with their 32-bit processors, and moving to 64-bit. AMD came out with the Opteron 64-bit, which runs at lower clock speeds, but is incredibly fast. Intel has the same with the Itanium. So in the future, all chips will be at 64-bit at lower clock speeds.

However, since the new P4 came out with the 800Mhz Bus speed, there is going to be a lot more faster processors out, and new programs that require those top end speeds.

will the 32-bit to 64-bit transition be like when they went from Win 3.1 to 95, when they had to redesign everything all over again to work with the new system?

Yup, but it will be backward compatible with 32 bit OS'es. However, you won't get full functionallity unless you get a 64 bit OS.