Tom, there is a
long list of bugs in 8.1.7.0 that 8.1.7.4
fixes. The one in particular that bit me was an import bug that
basically makes it impossible to import to a different schema. See
this
thread.
The 8.1.7.4 patch will convert an existing database. That worked fine
for us on Solaris, but on Linux I've only installed the patch before
creating a database. Since you have no data in your db, I'd probably
blow it away and create it again from scratch after doing the patch,
but it should work to upgrade in place, too.
For removing a tablespace, see
this post,
and/or some (already outdated, naturally)
Oracle docs
I put on my website.