The first step is downloading nLite. The latest version as of writing this article is 18.104.22.168. Click on this link to go to the download page. Choose either of the available downloads (Installer or Self-extracting archive). Once downloaded, extract or install from the downloaded file. Then run nLite from the desktop or Start menu.
The first dialog box contains welcome information and a language-chooser. Click Next.
The next page asks for the path where the Windows 2000/XP/Server 2003 installation source is located. Point it to the folder where you have extracted the .ISO file. It will then scan the folder for the Windows Installation files. Remember that you need to point it to a Windows installation source, you cannot point it to your Windows folder on your hard disk.
Press Next a couple of times to reach this screen:
Here, select the options you want to configure. Here are the functions for each option:
Service Pack: Integrate/Slipstream a service pack into your Windows installation source. The resulting Windows installer will have the specified service pack already present. Use this if your Windows install source contains an older service pack or none. You can find the service-pack installers on Microsoft's site.
Hotfixes, Add-ons and Update Packs: These are installers for patches that Microsoft or other vendors have released after the latest service pack. These can be downloaded off Microsoft's site or through other methods like AutoPatcher.
Drivers: This section will integrate/slipstream drivers into the Windows install. Very important if you want to include drivers for your motherboard's SATA/RAID chipset. You will not have to load the RAID/SATA drivers off a floppy during the Windows install if you've integrated the drivers into the Windows install. You can also integrate drivers for other devices which need a separate driver. These will then be installed with Windows itself.