That seems highly unlikely. I do a gazillion installations a year, and I have never seen SP-3 unable to go on... In fact, my install disks are made from an XP SP-3 master.
Now, it IS possible on upgraded systems - I have seen that - Where a retail upgrade was used to install WinXP with... But if you are using a stock, OEM installation disk, Just find someone with an SP-3 OEM installation disk and use it instead.
It seems more likely that some configuration is preventing a clean load from the SP-3 distributable, rather than hardware. Maybe something BIOS related (you should have the newest BIOS available).
SP-3, and updates following, are pretty critical to security. Many exploits that worked on SP-2 are no longer functional in SP-3. The same is true of Windows Media Player and Internet Explorer, to include DirectX... All of these subsystems are where your vulnerability lies.
I would highly recommend befriending a local guru to figure out what/why. Even if you had to start from a clean rub, it would be to your advantage.
Otherwise, chuck it, and get a newer used system. 2600+ to 3g boxes are readily available under $100 (or at least they are around here). One way or another, your system has to receive critical updates. There really isn't any good prevention (in Windows) without that solid base.
I'll check out what you suggested, but Online Armor++ 4.0 is my current firewall.
I am unfamiliar with OA++. I know the firewall, which is good, and I believe the AV component is by Ikarus, which is no terrible slouch, but I am not in favor of "one-step wonder suites." I MUCH prefer a layered defense - Due to that, I haven't tried it.
I DO know Ikarus, though, and I would suggest that there are better solutions available.
I want an "Apple Laptop" and I'm trying to make this one last until I can afford a new one.
I'm sick of "Windows" and the virus headaches.
I can take it back to factor specks and load SP2 from a disk and then get my firewall up and running, and then get the updates from windows.
But I still worry about getting viruses the first time I get on the internet, while I'm updating Windows XP.
It may be time to buy a new computer.