I'm going to try with SP2 first. If worst comes to worst I can restore back to the default OS using the recovery system.
I've used nLite to strip down XP a lot. I also slipstreamed in a package of Windows updates and Firefox, Skype and AVG Free Edition. I had some issues with the sound card not being detected. I had to manually update the device drivers in Device Manager. I was also unable to restore my backed up XP activation files so had to activate XP again to use Windows Update. I ran Windows Update and only included the bare essential updates. I missed out IE7 and all versions of .Net for example.
Having done all this I can safely say that XP is a lot faster to start up and is a lot smaller. My Windows folder was 447Mb prior to running Windows Update and is now 540Mb. The system now takes 53 seconds to boot to desktop with a live wifi connection. I'm a happy camper now and will definitely be sticking with XP.
On investigation it appears I've stripped out some of the components used by the Windows firewall. I've just installed PC Tools Firewall Plus
which appears to be a lightweight firewall. Startup time is now 63 seconds.