I just installed 1.8 on a W2K machine, so I don't have experience with it yet, and I don't have XP. I ran 1.7 all the time though, just fine.
I thought the version 3 didn't allow the lesser compression ratios, beyond 128Kbps or uncompressed wav files. I don't know, I jumped on the TT raft about 8 months before it sank, so all I could run was Recast versions, with the constant internet calling.