Bit weird though that it has just had a reformat and is still going slow, though its not the fastest system around anyway, and Windows SE isn't the most stable operating system of all time.
If you were going to update soon, I wouldn't bother buying windows xp for that machine until you get your new one (you'd probably buy from a manufacturer i'm guessing? in which case, windows XP home would probably be installed with it anyway)
If you weren't going to update so soon, I'd then think of doing something to that PC, though its probably not worth it as you could get a whole system now for less than 500 quid that would be 10 times if not more better than that one!
And as for that system
That is kind of like the first one I had... like 7 years ago, hehe:
AMD- K6(tm)3D processor - I had a 200Mhz one, don't know what yours is from that, and I had a old Voodo 3D card, and if I can remember correctly, about 32 megs of RAM so at least you beat my first system there
Oh and as for the disk cleanup thing is concerned, its good you've been doing that, and as for disk defrag, i'd run it from Acessories, System Tools as soon as possible.
It might get things going a bit more smoothly for you (though its just been reformatted, it probably won't need it that much, but you never know how it was formatted).
I would do this in safe mode, but since it doesn;'t like you, try closing off as many programs as possible and runnning in normal windows then and see how far the process gets and hopefully it'd help, though i'd seriously consider quickly booting into safemode and jus running it over night. It might work wonders for your slow machine
i hope this helps