Functionality-wise, WinDVD 3.0 will work well under Windows XP. I have noticed no noticeable performance decrease as compared to Windows 2000.
At this point, I've only tested this on a machine at work, which has a Pentium III-500, 128 MB RAM, and i810 chipset (4 MB). Works well with both XP Home and Professional.
The deciding factor for performance will lie with Windows XP driver support (for hardware devices). Since Intel/Microsoft has a semi-agreeable relationship going, I may have lucked out in this case.
Another deciding factor for performance is if the graphics card drivers, and if it supports DXVA. If the card historically supported Hardware Motion Compensation by default, this should be an easy transition.
For those laptop users whom use low-end Trident Cyberblade chipsets, they are pretty much SOL with Windows XP. Since these graphics chips only support playback in previous OSes at 800x600/256 colors, there will be no native support for this color palette in Windows XP. Result- no DVD playback, and overlay surface errors arise.
To get back on topic, WinDVD 3.0 should run well under Windows XP, assuming one has a mainstream AGP graphics card, workable drivers for audio cards, mainboard chipsets, and updated DVD-ROM firmware. Just wouldn't recommend upgrading to Windows XP for at least the next 6 months, IMHO.
Best of luck.