|"However, she has never upgraded to SP2, so I'm wondering if maybe this is the problem."|
It must be! I just checked (Help - About ...) my Wordpad and it's version 5.1 ... XP SERVICE PACK 2! So, obviously there was a SP2 update to Wordpad. Why it won't open your files sounds to me like a Micros**t bug, or nastiness (who needs their old files anyhow?).
The wordpad.exe that is executed is in folder C:\Program Files\Windows NT\Accessories. I don't know if this would work, but you could try renaming it to (say, SP2wordpad.exe) and copy your sister's older wordpad.exe.