Internet Explorer team blog has posted and article relating to the upgradation of Windows XP SP2 to SP3

Installing IE8 Beta1 on Windows XP SP3  is fully supported, so go ahead and upgrade your computers to XPSP3 and then install IE8 Beta 1 to try out our new features. You will be able to uninstall IE8 Beta 1 at any point to revert back to either IE7 or IE6 depending on what you were using before.

However, if you already have IE8 Beta 1 installed on XPSP2, Windows XP SP3 will not be offered to you via Windows Update. This is because after you update your system to XPSP3, you will no longer be able to uninstall IE8 Beta 1 and the Remove option will be grayed out under the Add/Remove programs in Control Panel. The reason is the same as in IE7 case described above. Since people are more likely to uninstall beta software, we strongly recommend uninstalling IE8 Beta 1 prior to upgrading to Windows XP SP3 to eliminate any deployment issues and install IE8 Beta 1 after XPSP3 is on your machine.

So for all those who are planning to install Windows XP SP3 and are using IE 8 then first of all U have to uninstall IE 8 otherwise you may face some problems during upgrading Windows XP