It should be able to handle multi track, but with some latency (depending on the audio card). MOTU cards should handle that fine.
Don't know if SP2 is really necessary though. I haven't seen many people whos computers didn't start to behave oddly after its installation.

Windows XP pro (newest SP)
700MHz Pentium 3
256MB DDR RAM (i think DDR?)
20GB HD (5400RPM i think)

not sure because i bought it off eBay. is this sufficient though? -->>>

I'm a little suspect of the amount of RAM and your HD size and speed. As Harris said above, 512MB of RAM at least, and more is always better.

I would suggest getting an external Firewire harddrive (at least 7200 RPM, and as big as you can). Your system drive will have that much less to deal with, and it will be easy to transfer data to another computer later, if you need to.

Having enough disk space is also an issue. One minute of mono audio at 16 bit, 48 khz is about 5.5 MB. Doesn't take much math to see that multitracking can take up a lot of space in a hurry. And you don't want to be in the middle of a take when it runs out.

- Matt

Echoing what Matt said. I am not familiar enough with the various Windows operating system versions to discuss them intelligently (me being a Mac user), but the general principles apply across all platforms. That 20 gig drive is gonna feel real full real fast. And I wouldn't attempt to go out with less than a half gig or more of RAM for any timeline-based media. As for harddrive speed, I know that Apple gets away with "cheating" by using <7200RPM internal drives, but you definitely want to get 7200 if you buy an external Firewire drive. Prices have come down so they're not that much more expensive.