Windows XP Service Pack 2 is now available via windows update. Although is was reported to be available sooner it was only a restricted distribution. Problems you are most likely to encounter are with the Firewall. You may find that some of your programs stop working, these will most likely be the ones requiring internet access. Configuring the firewall to allow these programs through will solve this.
Personally I will be disabling Windows XP firewall and using Zone Alarm. Windows firewall is a step in the right direction and should be enabled if you don't have another firewall. I don't trust it yet. Zone Alarm has been around a while and has been tested and proven. Just because something is newer doesnt mean its better (Zone Alarm 5 security suite springs to mind).