XP will run decent with 256 MB of RAM.
Usually the most you'd ever need in XP was 2 GB.
Windows 7, needs 512 just to run (and not too well, either. Though, much better than Vista.)
1 GB is the minimum I would recommend to use with 7, so yeah, even with that, you're only getting about 300 MB for applications, so you're running low.
Get more RAM if you can, or go back to XP.