For XP SP3 installation, rule "if it's ain't broken - don fix it" is valid.

Generally, service pack is just a collection of numerous OS fix-es (essentially different system files) that can be (and usually is) downloaded from 'Windows update site'. Installing SP on a computer that works normally, and already have these fixes can't do much good, and sometimes can produce problems (as we can see from some posts here).

But, if your PC behaves strange (usually because of altered/erased system files and folders, that are result of virus/rootkit/malware or user mistakes) installation of SP (2 or 3 depending of previous OS version) can fix all the issues in many cases, and it's faster and easier way then doing clean Windows installation and installing all the programs.

Also, if You are doing fresh Windows installation, then SP 3 installation is highly recommended, because You get all the latest fixes, and it shortens the time spent on first Windows update. And it's problem-free because there are no 3rd party programs, registry changes or configuration files (that usually cause problems when installing SP on already working system).

Advanced users (virtually everyone who is comfortable to work in command line and knows how to burn bootable CD) can slipstream SP3 with XP installation (slipstreaming is kind of 'installation on to the installation CD', ie replacing old files with new ones) and that way they can save the time needed for updating the OS to SP3 level.

update after installing Ser pack 3 on all my computers (6) all is well and working better then ever.