I never bothered to benchmark a 5,400 rpm HDD in a notebook, so I can't say what read/write throughput you should be getting. But they are slooooow for sure.
As far as the HDD activity LED is concerned it's probably endlessly indexing. I'm guessing it's using Vista Home Premium?
Drop in even the cheapest SSD you can find, and you'll be amazed at the increased performance.