Yes, it extracts the contents of the file to a folder it'll ask the name for, and there will then also be subfolders created. It will keep it from starting the installation though.
Check the following Link for details (you could also use the info from that link to slipstream SP4 into a Windows 2000 Installation CD, but that won't be what you will want to do in your case, unless you want to reinstall the server).
http://www.petri.co.il/windows_2000_sp_slipstreaming.htm
