This is a question that I have been asked several times. There is a really useful document I suggest you look at; The Windows XP Pro resource kit documentation. I will start with a few of the questions I have had recently.
Slipstreaming XP SP2:
Q: What is slipstreaming?
A: This is a way to integrate Service Pack 2 in to your Windows XP installation point (whether that be on CD or a network share).
Q: Why do I need it?
A: It is a way of installing Service Pack 2 with the original installation in one swoop, without having to install both separately on a new machine for example.
Q: How does this help me when I don't have any new machines on my network?
A: Windows XP can sometimes ask for a copy of the CD or refer to your network installation point when installing components for example. It is not a good idea to provide a Pre SP2 source for these files.
Q: What are some of the potential pitfalls?
A: If you install a slipstreamed copy of Windows XP SP2, you cannot uninstall the service pack. This means you need to have your testing done before you deploy!
Without further a do, here are the instructions for slipstreaming XP SP2
Installing Windows XP Professional Integrated with a Service Pack
You can create an integrated installation of Windows XP Professional and a service pack on a network distribution share. During an integrated installation, the service pack and Windows XP are installed at the same time.
To create an integrated installation of Windows XP Professional and your service pack
xcopy D:\ E:\WinXP\PRO /e
After setup integrates the service pack files with Windows XP, you can deploy Windows XP Professional to your users' computers from the network distribution share in attended or unattended mode. During the integrated installation process, Windows XP Professional Setup (Winnt32.exe) installs the operating system with the service pack already applied.
When you run the ServicePack.exe program in integrated mode (ServicePack.exe /integrate:), a .log file is created in the systemroot folder on the computer that is running the ServicePack.exe program. If you plan to update more than one version of Windows XP Professional on this computer, you should rename the Spslprm.log file after you update each version. This ensures that you do not overwrite the current log file when you update additional versions of Windows XP Professional.
This scenario describes your options using Remote Installation Services (RIS) to install Windows XP Professional integrated with your service pack.
RIS supports two types of operating system images:
Installing Windows XP Professional from a RISetup image is similar to installing directly from the Windows XP Professional operating system CD, but in this case, the source files reside on the RIS server. You use RISetup.exe to create and install from the image.
A RIPrep image is an installation of Windows XP Professional that contains specific configuration settings made by the administrator. Typically, it also contains locally installed applications. In this scenario, you install your service pack to integrate it into the Windows XP Professional installation. You use RIPrep.exe to replicate the local (RIPrep) image to a RIS server, and then restore that image to a new computer on the network. RIPrep.exe can replicate single disk partitions only, and requires that your image reside on drive C.
For more information about RIS, including creating and installing RISetup and RIPrep images, see "Automating and Customizing Installations"