Microsoft Knowledge Base Article 298491 contains the following summary:

This step-by-step article describes how to use the System Preparation tool (Sysprep.exe) to perform disk duplication. You can use the cloning process to use an image of a Windows 2000 installation with its installed programs and data, for mass deployment of exactly the same installations throughout your organization. One problem from duplicating an installation of Windows 2000 is that each cloned computer has the same security identifier (SID) and computer name. This may prevent the cloned computers from functioning correctly in a workgroup or a domain. To work around this problem, administrators use the System Preparation Tool (Sysprep.exe) to remove configuration settings that are unique to the computer such as the computer name and SID. The resulting image can then be safely reused for installation on other computers.