Yes, re-installing Windows will almost certainly lose that Service Pack 1 installation, but that's best anyway since it's probably corrupted.
Many have had problems with Service Pack 1 and it seems best when it's loaded from a CD rather than a download. It has been on various magazine CDs and is also available as a free CD from Microsoft in the UK, although that will be dependent on the post of course.
The other way to tackle this is to just do all the various updates direct from Microsoft. Service Pack 1 is really mainly the collection of security updates plus the enabling of USB 2, and you can download these individually.