Kinda figures. If the diags have all been run then it's pretty much a given that the hardware is ok. You'll need to start checking out the SW. Although you may be running some spyware cleaning apps, there can still be some naughties present.

But...as you pointed out the memory amount is at the minimum that I would recommend for running XP, adding more would not hurt. The other thing to look at is, are you using the onboard video or do you have a video card in the system?