I just bought and installed Windows XP MCE 2005, which came with the Rollup 2 disk. Everything is up to date, except for Service Pack 3. Before updating it I would like to get honest opinions whether it is worth updating or if it is buggy. Please help.

A service pack is a collection for bug fixes and security updates. It wouldn't be wise NOT to install it.

For continued support (security fixes and the like) after July 13th 2010, you will require SP3. Also, there isn't too much reason not to install SP3, especially since you haven't had Windows for long and haven't had much chance to do anything with it (the most common reason not to upgrade to SP3 is that Windows can break with SP upgrades if you have messed with it too much). You are all set for Service Pack 3. It'll probably speed up your Windows install just a tiny bit, but it certainly won't cause any problems. Upgrade and enjoy.