Microsoft Windows XP Service Pack 2 (SP2) significantly improves your computer's defenses against attacks and vulnerabilities.

To help protect your Windows XP computer from attacks and vulnerabilities, install Service Pack 2 using Windows Update or Automatic Updates.

Note: Service Pack 2 makes significant changes to improve the security of Windows XP, and these changes may have negative effects on some programs and Windows functionality. Before you install Service Pack 2, back up your important data and consult your computer manufacturer's web site for information about Service Pack 2.

Description
Windows XP Service Pack 2 is a major operating system update that contains a number of new security updates and features. Like other Microsoft Service Packs, Windows XP Service Pack 2 also includes previously released security fixes and other operating system updates. Following is a summary of the new security updates and features in Service Pack 2:

• Windows Firewall
  Windows Firewall is enabled in almost all configurations, blocking network traffic coming into your computer. Blocking this traffic helps to protect you from worms and other malicious code that spread via the Internet.
• Internet Explorer Local Machine Zone Lockdown
  New settings for Internet Explorer disable the execution of ActiveX controls and Active scripting in the Local Machine Zone. This protects you from attacks and vulnerabilties such as Download.Ject.
• Additional Internet Explorer Security Changes
  Internet Explorer now includes a pop-up blocker, additional window restrictions, and changes in MIME type handling that better defend against social engineering and "phishing" attacks. A browser add-on management interface provides a way to identify and disable programs that run as part of Internet Explorer. Enhanced protection against security zone elevation and object caching vulnerabilities helps defend against malicious web scripts.
• Email Handling Technologies
  Outlook Express now supports the ability to read and compose messages in plain text and to block external HTML content such as "web bugs." Security checks are now performed in a more consistent way to help prevent the execution of malicious attachments.
• Security Center
  The Security Center "...provides a central location for changing security settings, learning more about security, and ensuring that [your] computer is up to date, with the essential security settings that are recommended by Microsoft."
• Automatic Updates
  The update services and automatic update feature of Windows XP have been improved. US-CERT highly recommends that you enable Automatic Updates.
• Data Execution Prevention
  Memory protection helps prevent attackers from executing code on your computer.

From US-Cert