I would say yes since a new security flaw was found a few days ago on system running XP and XP SP1. This flaw can allow an attacker to full take over your PC. Read more here
it.'s more secure straight out the box, but it blocks you from doing certain things like burning a xp disc or download more than 10 items at a time (they have a hack for that).
well in my opinion Yes SP2 is great (for the most part) but it is not "neccessary" if you run SP1 and a decent firewall and proper settings you will be fine!