The slowdowns are normal for hardware like yours. You're most likely getting a CPU bottleneck (as in your CPU is too slow to emulate the Wii at fullspeed. You should really, really upgrade to the latest development revision of Dolphin. 4.0.2 is old and very slow in comparison to the newest builds. You say you have Windows 7, but I hope you have the 64-bit version, since 32-bit support in Dolphin was recently dropped. You can legally get a Windows 7 install ISO from one of Microsoft's partners, as long as you have a valid license and key (64-bit versions of Dolphin have been proven to run faster too) so google around about that.
Upgrading your OS and your Dolphin revision should actually be enough to run Xenoblade Chronicles comfortably. If not, consider a slight overclock. There's no helping you with the Last Story though (some parts will appear to run fine, but this is one of the most demanding games in Dolphin, and your hardware is very underpowered for it). You can still play it, just be prepared for slow-motion (even on a real Wii, it lags on certain scenes, so we just can't have nice things, you know?).
Upgrading your OS and your Dolphin revision should actually be enough to run Xenoblade Chronicles comfortably. If not, consider a slight overclock. There's no helping you with the Last Story though (some parts will appear to run fine, but this is one of the most demanding games in Dolphin, and your hardware is very underpowered for it). You can still play it, just be prepared for slow-motion (even on a real Wii, it lags on certain scenes, so we just can't have nice things, you know?).