Windows XP Service Pack 3
Here's what Microsoft says about Windows XP Service Pack 3:
"Windows XP Service Pack 3 (SP3) includes all previously released updates for the operating system. This update also includes a small number of new functionalities, which do not significantly change customers' experience with the operating system."
If you currently have service pack 2 and have been downloading all of the Microsoft updates as soon as they're available then you can hold off installing service pack 3. You already have all of the previously released updates for the operating system. If you're still running service pack 1 (shame on you!) then immediately install service pack 3.
Do you need Service Pack 3?
There have been many reports of bugs, incompatibilities, and general headaches concerning Windows XP Service Pack 3. The Windows Secrets web site describes some of the problems that exist with service pack 3:
Internet connectivity fails when using black hole routers, which drop packets
False positives are generated by Norton Internet Security and other security applications
Device Manager settings go missing, especially in connection with using Norton Antivirus
Repeated rebooting occurs on machines using an AMD processor
You can't install any new updates
Third-party visual styles encounter problems
I installed service pack 3 and then went back to service pack 2. Why? Not because of any of the reasons listed above. Service pack 3 broke my Remote Desktop Connection. After some searching, I found literally hundreds of articles on Google describing a similar problem. The solutions I found were varied and not user-friendly. Since Microsoft support for SP2 doesn't expire until early 2010 and Windows 7 is scheduled to be released at that time, I happily returned to service pack 2.
If you're bent on installing SP3, perform a full system backup first. The Microsoft knowledge base article Steps to take before you install Windows XP Service Pack 3 outlines all recommended pre-install steps, including troubleshooting information.