Assuming you don't want to spend the time to re-install you OS and programs, here's how you can do it with some hardware upgrade:
1. To solve the space problem, install the second drive (a faster one if you can), let's say Drive D, and move all you data folders over. Then, install any new programs on a newly created d:\Program Files folder.
2. To improve performance with this setup,
a)add memory (up to a total of 2GB for Windows XP or 4GB for Windows Vista). Be sure to set your Virtual Memory to Custom and set both Initial and Maximum size to 2.5 time the total memory you have.
b) Move you virtual memory to the new faster (7500rpm) disk drive.
For your reference, the steps are:
2.1 My Computer->Properties:Advanced tab -> Performance: Settings button -> Performance Options:Advanced tab ->
Virtual memory:Change
2.2 In Virtual Memory window, Click 'No paging file', then SET. The 'System managed size' bullet should be cleared now.
Then press OK to back all the way out. Then restart Windows.
2.3 Get back into the Virtual Memory window. The changes should be reflected. Now highlight D:
2.4 Click 'Custom Size', then set Initial Size and Maximum Size to the same value: 250% of the total memory
2.5 Click SET, the click OK to back out, then restart Windows.
You can use System Tools:Defragmentation:Analyse to verify that the green System Files for Virtual Memory has been moved to D:.
With this, Windows will run mostly out of memory (faster) and all paging (unavoidable disk activity) involves only the faster new HDD. The larger memory also reduces the amount of necessary disk activity.