Reinstalling Windows will almost certainly improve performance. If you’ve got the license key sticker on the side of the PC, but not the disks, you can usually pick up a generic OEM version of XP on Ebay for cheap.
If you really don’t want to reinstall Windows, try updating the graphics drivers (from the AMD or Nivida site, depending on the card). Also download a demo of Tuneup Utilities (http://www.tune-up.com/) and work through the optimisations that offers. Sometimes a registry defrag or clean can work wonders. Make sure you backup first though, just in case.
As others have suggested, something like Ubuntu or Lubuntu (even the live boot CD, which won’t touch your disk) will likely perform much, much faster.
Finally, on my very slow PC, I have found Media Player Classic Home Cinema is even better than VLC at playing SD and especially HD videos smoothly. It’s free to download, and worth a go.