yes it should install correctly on actual hardware. the vmware application mimics physical hardware that the operating system detects and installs to.
I've personally installed Windows XP Service Pack 3 on a lot of computers here in the office. All 30+ installations worked fine and without any problems
These computers are relatively old dual core lenovo thinkpads, and the windows xp installation on these machines have been installed for at least 1 year ago. And a lot of apps have been installed on these machines prior to the update to SP3. MS Office, Adobe products, messengers, skype, and etc. On some systems we even had to downgrade to IE6 (some legacy software requirement), and still Windows XP SP3 installed fine
Goodluck on the upgrade