In today's world of internet connections and everything readily available at the push of a button, do we really need 1Gb of printer drivers? Ok, that goes for Vista, not XP, but XP still has a bunch of camera drivers, printer drivers, scanning devices and a whole lot of things we don't ever need, since we install drivers ourselves. A nifty little app named nLite can not only help you create your own stripped down copy of XP, but it also enables you to integrate service packs, hotfixes, drivers, etc. right in!
All you need is the nLite application, and a Windows CD. You will need to copy the contents of the CD to your hard drive, where the modifications you select will be made to the folder. Once you are done, you can pack it all up into an iso file, or burn directly to a CD. the CD will be bootable and you can install Windows without any problems whatsoever.
There are heaps and heaps of options in there, and the interface is very helpful, so if you're not a computer whiz you can still use it. You can select groups of things you definitely need at the beginning, and the application won't let you remove those. In addition, potential problems are highlighted, and almost every item has a good description, so you can find what is needed and not needed pretty easily.
You can also choose to integrate a service pack, and since I only have an SP2 CD, this saves me the trouble of always having to wait ages for Microsoft Update to get and install it. You need to download the SP exe file, just point to it, and it will be integrated (slipstreamed). You can also download and add hotfixes the same way, and you can add drivers as well, pretty impressive.
What makes this all a delight to use is that CD burning and iso creation is built right in. You can also save your profiles, add extra folders to the CD, choose unattended install options, set up some basic Windows options before install (showing known file types, user accounts and so on), all in all, the application is extremely extensive. Also, if you need the same functionality, but you have Vista, you can use vLite, by the same team, created for Vista.
Update: Note that both nLite and vLite have not been updated since 2008. If you want to create unattended discs of Windows 7 you need a program like RT Se7en Lite which enables you to do so.