Having only 256MB of memory is the biggest reason for poor performance. I'd consider adding memory. You can go here to find out if memory is available for a system of this "vintage" and how much it costs. (I wouldn't spend much on a system this old.) 512MB would be a help, 1GB would be better.
As for disk space, I'm afraid it's a manual "search-and-destroy" process.
1. Go to Start - Control Panel - Add or Remove Programs and un-install any programs not needed.
2. Open Windows explorer and navigate to the Documents and Settings folder on the C: drive. There, you'll find a folder for each Windows userid on the system. Look within each user's folder for a "My Documents" folder. Within this folder is where you should find most of the "stuff" saved by that user.
3. After you've completed step 2, make sure you empty the Recycle Bin. Until you do this, the files haven't really been deleted yet and you won't see any improvement in disk space.
Even after steps 2 & 3 have been completed, you won't see a great deal of free space. Your disk is only 10GB (22%=1.36GB) and Windows XP will consume 60-70% of that.
With a 10GB drive, you'll probably never have more than 2-3GB free, even on a good day. What will help most is more memory. This would minimize the size of swap file needed and therefore speed-up the system and free-up some more disk space.
There are also many Windows settings that can be "tuned" for better performance, but in this case, I'd be surprised if they do much good. If cleaning up the disk and a memory upgrade (if you can get it cheap) don't do the trick, I'd consider cutting my losses by donating this system to Goodwill (tax deduction) and go shopping for a new system. You can find a much better system than this for just a few hundred dollars.