Re-installing Windows generally does improve performance and stability especially if a lot of software has been installed/uninstalled leaving registry and temp file junk all over the place. By the sounds of what you're saying the XP media you have is quite old so my advice would be to bring it up to date before re-installing, that way you have fresh media that is also complete and current without the need for endless Windows Updates.
The simplest approach would be to
Slipstream Service Pack 2 into your existing install disc and then use an update tool like
RyanVM's Integrator to bring it right up to date before burning to CD. The process is quite straight forward as long as you follow the instructions carefully.