The messages/information you are receiving is simply confusing you.
USB 2.0 is fairly new and therefore not supported by older versions of Windows (98, ME, etc.etc.). Windows XP has native support for USB 2.0 and has since SP1.
Documentation alerting the need to download drivers for USB 2.0 are simply for 98/ME and older Windows versions.
The alerts you are getting about installing SP1 or greater are simply noticing you have Windows XP and not an indication that anything is wrong (i.e. they just check the OS and say "Hey, this is XP.. it only needs SP1 or greater so why is he running me?").
The problems you are having with a game controller and/or mouse could be a number of issues, but I doubt it's the USB drivers. It can be anything from flakey hardware, overcrowding older 1.1 devices with lower power feed, incorrect wiring if it's to an external/back port, BIOS settings or older BIOS, etc.etc.
I'd spend some time in the Device Manager- look at reserved and used power on the USB devices Properties, and possible shuffle things around to different USB hubs. Also, many mainboards have leads on the mainboard for even more external USB ports- if you're not using these, I'd disable them in the BIOS or Windows as well.