Slipstreaming is something different.
I've used tools like nLite (XP) and vLite (Vista) and they work pretty well. Here is a
similar tool for Windows 7. I've not used it, but it seems to be along the same lines.
I've run a Vista Installation on as little as 256MB, and taking up 2GB or so of space. It was passable, but not great.
EDIT: Actually, the original software is good for some things but it doesn't look like it can remove components from the install.
rt7lite looks like it can. Haven't tried either piece of software myself, so I'm just going by what I read.