Microsoft TechNet
Installing Windows XP Service Pack 3 (SP3)QUOTE
General Requirements
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To install SP3, your computer must meet the hardware and operating system requirements listed below. In addition, your computer must at least be running Windows XP with Service Pack 1 installed.
We recommended that you have Service Pack 2 installed before installing SP3. You can download Service Pack 2 at the Windows XP Service Pack 2 website.
Read all the posts written (mid March) by Chris Keroack [MSFT], Chris Keroack, Release Manager, Windows XP Service Pack 3 in this thread
here. This is a definitive discussion of what can and cannot be done with SP0.
My conclusion: It is technically OK (although not suppoted by Microsoft) to integrate SP3 into SP0, and install from the resulting bootable CD. However, if you install from a SP0 source, you should then install SP2, and then SP3.If your source CD is SP2, you might find this thread interesting
Integrating SP3 (written in Apr, before SP3 final) that discusses integrating SP3 into SP0 or SP2. It includes a batch file to intregate SP3 into SP2 and cleanup SP2 leftovers in one step, doesn't use nLite.