You have to follow the following steps:

Create Folders:

Create 3 folders – C:XPSP1, C:SP1 and C:XPBOOT

Copy WinXP:

Copy the entire Windows XP CD into folder C:XPSP1

Modify files:

You will need to download the SP1a Update, which is around 125MB.
Rename the Service Pack file to XP-SP1a.exe
Extract the Service Pack from the Run Dialog using the command:
C:XP-SP1a.exe -U -X:C:SP1

Update

Open Start/Run… and type the command:
C:SP1updateupdate.exe -s:C:XPSP1
Click OK
Now the Folder C:XPSP1 contains: Windows XP SP1

How to make a Windows XP SP1 CD Bootable

Download

Download xpboot and extract it (xpboot.bin) into the folder C:XPBOOT

Run …