Service packs are just updates to the operating system. They sometimes add new features, like for instance in WinXP SP2 they have a new interface for choosing and connecting to wireless networks, if I recall correctly, that makes it easier. Mostly though they fix bugs or security holes.
You definitely want WinXP SP1 but some I suggest you hold off on SP2 since there have been some compatibility issues with SP2 and some games/software programs.
I haven't upgraded myself to SP2 yet but I'm sure I will in the next month or two.