Xp SP2 is for desktop OSes (Windows XP Pro/Home) *only*.
Unlike hotfixes which address specific bugs/vulnerabilities, service packs
contain all hotfihes since previous service pack as well as significant
additions/changes to OS functionality (in case of SP2 it is improved Windows
Firewall, DCOM security, browsing security etc etc). Obviously you will not
have all services and features of Windows XP on your XPE device (otherwise
why do you use XPE in the first place?

).
AFAIK XP SP2 setup is not designed to handle absence of particular default
XP functionality in XPE. Although you could try to *make* XPSP2 run on your
XPE target device by adding all necessary components/reg entries/whatever,
it will probably lead to unpredictable results. For XP Embedded you should
wait for XPe-specific service pack. It will update XPE Tools/Database i.e.
development environment, not already deployed target devices.
Al.
In