I've had zero compatibility issues with SP2, and I play lots of old games, including FF7. I've certainly never had a "hassle running a program" that wasn't also a hassle in SP1.
As for the firewall, I like to be informed when programs are trying to open ports, and this firewall does a nice job of doing that. You can always turn it off or use something that offers more protection (outbound connection filtering as well).
They limited the number of outgoing connections you can make per second (I believe the limit is 50/second -- in an attempt to slow the spread of viruses or something) which may hurt the performance of P2P apps, but only if you are really busy on them. But... why are you using P2P anyway?

There are numerous security enhancements / improvements and most of the buffer-overrun problems that you hear about have been fixed (*ahem* Remember Blaster? *ahem*).
I recommend that if you're scared of it, you give it a second look before you pass it over.
[Edit]
As much as I would love to upgrade to winXP, my computer just can't handle it. It is a P2 400mhz, 256mb of ram, and I don't even know what kind of video card is on here.
I've played FF7 with no issues (and full speed) on a P2 266 MHz, 256 MB of RAM, and an nVidia TNT2 with Windows XP.