It sounds like you have been through the ringer, for sure. Have you tried another USB cable? Defective cables can do odd things. The cable is generic, so any other USB cable you have handy should work.
XP does not always "flush" the buffer correctly so messages about devices continuing to run are fairly common. This is one workaround.
Open My Computer and right click device, select properties. Then click Hardware tab, select device and then click properties again.
In the Policies tab you will find the two options. If you select Quick Removal, you won't have to use Safely Remove Hardware every time you disconnect.
Also check to see if the manufacturer released new USB drivers for your laptop after SP3 was released. Many did so. This might be a good time to make sure you are not missing any updates. I like
Belarc Advisor for this. It's free and will tell you all kinds of things about your system and the software you have installed.
Let us know how it goes. USB problems with XP SP3 are very common.
PS: In Kobo's defense, many XP installs are getting long in the tooth. I spent a fair amount of time whilst on holiday reinstalling XP on older computers that had developed, urmmm, eccentricities over the years. Testing is done on installations that have none of the problems that sometimes show up on the kind of computers we have at home.