My guess is that your system is old, it's full of useless ancient crap. A format will solve all your problems, but yes, everything will be gone. Seems like it's not a hardware issue, but rather just an old PC getting tired.
As for hardware upgrades, ditching the whole system and starting fresh seems to be what everbody here says (rich bastards, not everyone can just do that) But I must say, grab another stick of RAM for a total of 1 gig and you will notice a major performance increase. Getting a relatively cheap stand-alone graphics card would be ideal aswell, if you want to increase gaming performance. I think a 6600GT, 7600GS, x1600, or even a x1950 Pro would do the trick.
Also a tip for older machines, managing your computers page file and cache really can help speed things up. If you only have one harddrive, try to limit how much page file is actually used (you can take more of a risk if you have boat-loads of RAM)
~Bryan~