In a typical installation of XP installed on the C drive, some files are required to be in the C:\ and if they are missing XP will complain and/or you would not be posting from the computer. Sometimes, files end of there through actions of the user or an installation - log files for example. Most of the required files are going to be hidden and sometimes read only so you don't accidentally hurt yourself.
I do not have a C:\SYSTEM folder, but I do have a C:\WINDOWS\SYSTEM and C:\WINDOWS\SYSTEM32 folder.
I am happy with the contents of my C:\ because I look at it once in a while and clean up things that I cannot explain what they are and what they do.
Here is one of many articles (this one from 2003) that helps understand what you can expect to see in the system partition (C:\) and some of the folders that XP creates and mantains.http://www.informit.com/articles/article.aspx?p=101731
If you are not sure about a file or folder and can't find anything in a Google search, this is a good place to ask about specific examples.
I would say it is unlikely that "extra" files in the root directory are contributing to your slowness issue, but there is a "Slow Computer" sticky post at the top of this forum to help you get started and help you ask the right questions regarding that issue.