Replace your windows with windows 98 SE, and add Cacheman which is a cache manager and ram defragmenter, use BSplayer o GDivX as your player and it should run at a decent speed.
Alternatively use another OS like linux or even better try Menuet OS which fits into a floppy so you can boot into Menuet just by starting your laptop with Menuet's BOOT floppy in it.
http://www.menuetos.org/
There's also a player based on a linux kernel which is very thin called Movix, go to
http://movix.sourceforge.net/ to find out more.
Basically if you are going to use your laptop to watch movies and it's not fast enough, try booting into a thinner OS like a linux, or DOS with a DivX player like QuickView Pro (
http://www.multimediaware.com/qv/) or any other minimalistic OS like Menuet or any others. I would try this before upgrading the hardware.