Windows 2000/XP SP Reinstallation

You do NOT have to Reinstall Windows 2000 or Windows XP Service Packs after system state changes…

After you have installed the service pack, you do not need to reinstall it if you add a device or new software to your computer. For example, Windows 2000 and Windows XP include a file named Driver.cab, which contains all of the files potentially installed by Plug and Play (PnP)-class installers. Setup and other components use this file to install the drivers for new devices (for example, a PCMCIA card or a USB keyboard) without requiring access to the Windows CD or the network.
The service pack does not update the Driver.cab file itself; instead, the Update.exe program installs an additional driver file named Sp1.cab (or other if the SP number is greater). This file contains only updated versions of drivers that exist in the original Windows 2000 or Windows XP Driver.cab file. In addition to the Sp1.cab file, the Update.exe program installs a new Drvindex.inf that points to Sp1.cab for all of the updated drivers and also points to Driver.cab for all of the remaining drivers.
Update.exe installs a Layout.inf file. Layout.inf ensures that the correct software is installed and that all the correct updates are made to Windows 2000 or XP when you remove services from or add services to your computer. For example, if you remove a service from Microsoft Windows NT 4.0 and then reinstall it there, you must reinstall the service pack after you reinstall the service. This is unnecessary in Windows XP. The Layout.inf file is updated automatically to determine which files must be installed from the original Windows CD or from the service pack and, if necessary, the file prompts for the appropriate media. When you install a Windows 2000 or XP service pack, the Update.exe tool performs the following actions:

• The Layout.inf file is updated with an additional source for the Windows service pack files. When you change or add components, the Layout.inf file points to the correct source.
• The source location is stored in the following registry key:

HKEY_LOCAL_MACHINE\SOFTWARE\Microsoft\Windows\CurrentVersion\Setup\ServicePackSourcePath

• The source might be a network share for the Windows service pack, the Windows XP/2000 service pack CD-ROM, or if you install the service pack by using the Express Installation feature from the Web, the %SystemRoot%\Servicepackfiles folder.
• The Drvindex.inf file is updated to point to an additional .cab file for drivers that are updated in the Windows service pack. The .cab file is named Sp n.cab (where n is the service pack version number). This file is installed in the %SystemRoot%\Driver Cache\I386 folder.
• A new Sp n.cat file (where n is the service pack version number) is installed for the updated files. This file replaces any previously installed Sp n.cat file that was installed with a Windows XP/2000 hotfix.
• The Sp n.cat file is installed in the %SystemRoot%\System32\CatRoot\{F750E6C3-38EE-11D1-85E5-00C04FC295EE} folder
• Windows service packs also perform version checking on files so that post-Windows SP n hotfixes (where n is the service pack number) remain in place.

You do not have to reinstall hotfixes after you install the service pack. For example, when you install Windows XP SP1, hotfixes that you installed before you install Windows XP SP1 are updated to the Windows XP SP1 files. Hotfixes that you install after you install Windows XP SP1 are not replaced.
Note that hotfixes do not update the Layout.inf file. Therefore, if you install a hotfix and system state changes occur, you may have to reinstall the hotfix.
327393 has more info.