I ran XP Home comfortably on a machine much slower than that. I'm almost positive spyware is the problem here. The usual regiment of Spybot + Adaware would be great.

Many commercial virus scanners, also, are computer hogs. You can't turn them off without the task manager and they're always nagging you. Unfortunately, they do the job the best, and the only free one I can think of is slow and has no active scanner.

Hopefully the spyware scan will hope.