Increasing the amount of RAM would be what would give you the biggest bang for your buck by far and away. XP alone wants 256MB, and then each program you run wants more on top of that (figure anywhere between about 16-64MB for most non-game apps).
Really doesn't matter what else you do to the system, the lack of RAM is your performance bottleneck. Your ONLY other option would be to try reverting back to an OS like Win98 that might run a bit better on 128MB of RAM, but I'm not so sure how well it'd like that Transmeta CPU. It would probably detect it as something like a 486 CPU, and so programs may not run.
I own a desknote pc and the processor is transmeta 1ghz, 128 mb of RAM and 20 gigabye of harddisk. and currently i'm using win XP (classic mode). the desknote is very very lagging and too ages to switch on an application. i would like to ask is there any possible way of boosting my desknote performace apart fom upgrading the RAM.