Slipstreaming xp is a way to update the files on your windows xp cd. This usually entails you copying the files on your cd to your hard drive and downloading the full network install of the service pack. Once you have the service pack you simply unpack it and update the windows xp files and then burn your cd.

http://www.winsupersite.com/showcase/windowsxp_sp2_slipstream.asp
The website listed above contains a rather detailed tutorial on how to do it.
This is the recommended way of doing it.

If you want to slipstream sp3 instead of sp2 simply download sp3 and run the procedure above. Also the if you download the full network installs they have rather long names so you may want to rename them. For example the name of the full network install of sp3 is WindowsXP-KB936929-SP3-x86-ENU, just rename it to sp3 and follow the procedure.

I forgot to mention that there are programs out there that will simplfy the streaming process. One such program is nLite and it will stream all service packs onto the cd as well as drivers. It can even make the installation of xp run unattended and it even allows u to remove some of the default xp program and tools from setup. If you use such a tool have a backup plan, they don't always work properly. I would caution against the use of nlite or any automated tools, as they can create a cd that will go threw most of the setup and throw the BSOD.

If you want to try nlite you can get it by follwoning the link below.
http://www.nliteos.com/
However be warned that you may encounter errors during the windows install.