Windows XP should run alright on that computer. Windows 2000 might be a better bet though.
Check for viruses and malware. Even though you've got McAfee on there, it may miss something (McAfee's track record isn't spectacular).
TrendMicro Housecall Online virus scanner - Must be opened in IE
Then use the big three to remove spyware from your system:
-Ad-aware
-Spybot S&D
-Microsoft Anti-spyware Beta
McAfee might be a bit heavy for the laptop to handle (it needs a bit of RAM). F-prot (anti-virus) and Sygate (firewall) should do you well.
Check out my Windows guide that's stickied at the top of the forum for more information.