When M$ releases updates, eventually there becomes an uncountable number of them, including security hotfixes and general application fixes. These are eventually bundled into what are called service packs or SP for short.
Windows XP now has 3 service packs, so the only difference in these versions is that the CD would come with them already installed (SP3 would of course have the most up to date service pack). If you have access to the internet you can download the service pack free of charge and install them yourself.
In a sense, it is simply an updated version Windows.