Well you've already answered your question, install more RAM!
You can increase your pagefile (Performance Options under Advanced Tab in System Properties) provided you still have enough available HD space. That being said you should also try to always have enough free space on your partition, this allows disk defrag to run properly. The old rule was 25%, but if your using a large HD (80GB plus) 25% isn't really needed & you could go with 20% on a 80GB, 15% on a 100GB & so on.....I wouldn't go less than 10% free space on anything larger than 120GB.
I wouldn't worry to much about increasing your pagefile & stick with upgrading your RAM 1st & formost. With only 128MB of RAM increasing your pagefile may solve the low virtual memory problem but your systems performance will be further degraded, by the sounds of it that PC is likely running pretty slow & you probably don't even realize it.
Since I don't know what MB you have I'll just say to add 512MB of RAM & simply leave the 128MB dimm out of the picture on the basis of compatibility issues. I'd also stick with a name brand of RAM like Kingston, Corsair, Ocz tech or Crucial.
If you upgrade your RAM just let Windows manage your pagefile, XP does a decent job of it.