If you've used Windows NT, 2000 or XP, you should have heard of service packs. Windows NT 4.0 is up to SP 6, 2000 is up to SP 4, and of course XP is on SP 2.
Yes, basically a service pack is a roll-up of all the patches released previously. It can also provide extra features to the OS. (Win XP got a new and improved firewall as well as a pop-up blocker for IE).
I prefer to keep the OS up-to-date between service packs, especially the critical updates. If you wait for service packs before installing updates, you miss out on a lot of important security fixes.