It should run fine with more ram. I have a 600MHz P3 w/ 256mb ram & a 4200rpm 12GB HDD that runs xp good enough for general office & internet type apps, but it also gets a good workout from other stuff I do with it. Just make sure to do some modifications to XP to make it use less resources. I'd recommend:
1. set the windows theme to classic windows instead of xp.
2. turn off disk indexing for faster searches (it's in the porperties of the HDD)
3. make sure not to install any unneeded software
4. make sure to put a low resource using antivirus on it. I recommend AVG and set it to only scan when writing to disk (that way it's not scanning everytime it reads writes and runs something to/from the HDD). Things like Mcaffee & norton are terrible choises for a system this old. I even tried avast for a while on mine,but eventually decided that avg seemed to be the most efficient.
I doubt a cpu upgrade would ne necessary nor worth it. The best you'd probably get in there would be a 850MHz P3 which wouldn't be that noticable of a jump. Dependng on the specifics of what's already in there you might be able to slap a 1GHz p3 in there, which would probably be noticable, if it works. The HDD, that's a good way to get more space and it might affect the over all speed, but for now I think that ram is your major bottleneck, 64MB is extremely low for xp. Check a site like kingston or crucial which have memory configurators to see what the max ram you could use is. Then dig around on ebay for that ram, but I'm betting they're standard low density PC-100 sodimm modules, and you can snipe them dirt cheap on ebay (I've gotten 128 modules for less than $20 shipped and 256 modules for less than $40 shiped).