I've been working with PC's for about 6 years now, spent 2 years fixing/building laptops. And I've been building/installing PC's for 12+ years. I installed SP3 over the top of my existing SP2 install, not one problem as long as I had SP3 compatible drivers. There was problems when SP3 first came out, where it would fuck up some peoples installs (my friend had it where he had to do a full reinstall of Windows). But as far as I'm aware the version Windows Update is distributing currently has no problems at all.
And JJO, I think the same way about testing updates, etc in a server environment, but I don't think it's as critical to a standalone user. But then again, I'm also not too bothered if I lose everything on my PC and have to start from fresh reinstalling, but that's because I've done it probably in excess of 1000 times over the years.