For such a good system which Windows XP can run flawlessly, I would definitely give SP1 a go.
If I were you, I would install SP2 RC1
to maximize the chances of getting IE6 problems sorted out.
Having not enough freespace i.e less than 300 MB in the hard disk (with Windows) can slow down any computer. So just be sure you have enough free space.
Remove Spyware -- which you have already done
Defragment
Scan
Apply SP1 or SP2 RC1
Check if IE is working properly.
If you are not satisfied, go for the clean install of Windows XP SP1 as you would have done.
