During one of the sessions at TechEd Developer 2008 I raised this point, and as many in the audience were unaware of this behavior when updates are applied I (and the audience) though this worthy of some blog space. The KB below relates to Project Server 2003 sp2a and later service packs – and as far as I am aware (but I am double checking…) this behavior is still the standard for Project Server 2007 too. So if you have modified any files in your deployment you should return the original (that you saved before customizing – right?) to its rightful place before applying the update. Once the update is applied then you will obviously need to re-apply whatever changes you needed to the new file (after making another secure copy of course). Regardless of if we overwrite your customization or don’t update modified file the above is good practice so that you know you have the latest files in place and you have consciously reviewed and re-applied updates. Who knows – we might even have fixed something so that you no longer need your mod!