Are we talking about XP with NTFS?
In general terms, the defrager in Windows XP can offer modest improvements in performance. Give Microsoft some credit. The have been working with the NTFS for some time now. If you are using NTFS, use degrag only when needed. If it says you don't need it, you don't need it. Do not store a lot of archive material on the partition that has your system and programs. Keep a lot of free space on it and XP using NTFS does a good job of keeping files well arranged.
But if you really want to optimize, and if you are willing to take the time and run the modest risk, do this.
1.) Backup all your stuff, in a format where you can see the files later.
2. )Do a clean, full install of XP
3. ) Install only the Apps that you need.
4. ) Get your needed data from the backup set.
The dubious advantage of this is that stuff is store where NTFS thinks it should go. And you clean out things you do not need. But it violates the principle I stated earlier about not moving data unless you have to.
SO, if you want to do all that, why not add some better hardware while you are at it and justify the extra effort. Like get another HDD and go RAID 0 and get some performance you can brag about.