First of all be sure to run the following anti-spyware tools, in this order, in safe mode, and remove everything they find.
Ad-aware with all updates, full system scan
Spybot search and destroy, with all updates, don't forget to immunize the system.
Reboot into normal mode, install windows defender and acquire all udpates.
Reboot into safe mode, run a full system scan.
Get us a list of everything that is in your add/remove programs list and leave it here, we will tell you everything to uninstall (some spyware can be removed through there).
When we're all done with those things there are a few more things which need to be done, but we'll cross that bridge when we come to it.
And you will HAVE to install service pack 2. Without it windows XP is like a fortress with paper walls. You need to be doing ALL windows updates. I have installed it on hundreds, if not thousands, of systems and rarely experience any issues.
It was true that at one point it did cause issues, but much like all microsoft products most of the kinks have been worked out.
I can not guarantee it will not cause issues again, but you have to try it.
If all of this fails, or SP2 gunks up the computer again, it's time for a clean install to start things off on the right foot. We can help you with that, too. Having a clean install with everything installed in the right order will help to maintain the integrity and stability of your system in the long run.
Good luck, we'll wait for your reply