WARNING: YMMV. I think we're close, but not quite there yet. These instructions have worked for some people, but I'm getting an error on the last step. So I think we're missing something. It's getting late here, I'm going to flag this as a community wiki. Perhaps you can sort out what I've missed.

Slipstreaming Windows 7 Service Pack 1

Windows 7 slipstreaming is not officially supported. You can use third party tools to accomplish the task. You can also do it yourself manually by unpacking the cab files, editing three text files, and using dism command to update the installation packages. Here's how to do that step by step:

1. Copy install.wim from your installation disc to your hard drive.

2. Go to the download Windows 7 Service Pack 1 webpage on the Microsoft website, and then click Continue.

3. After you have passed the "Genuine Advantage" test, you can choose to download either windows6.1-KB976932-X64.exe, or the 32-bit version windows6.1-KB976932-X86.exe
   

4. Extract the contents of the service pack with the -x command. Example: windows6.1-KB976932-X64.exe -x
   

5. Extract the contents of windows6.1-KB976932-X64.cab with a tool like 7-Zip (any compression utility that supports cab will do).

6. Extract the contents of NestedMPPContent.cab into the same folder.

7. Open update.ses in notepad and change Absent into Installed under OfflineInstall. It should look like:

   <Tasks operationMode="OfflineInstall">
       <Phase>
           <package id="Windows7SP1-KB976933~31bf3856ad364e35~amd64~~6.1.1.17514"  targetState="Installed"/>
       </Phase>
   </Tasks>
   

8. Open update.mum and Windows7SP1-KB976933~31bf3856ad364e35~amd64~~6.1.1.17514.mum (or the 32-bit equivalent) in notepad and change allowedOffline="false" to allowedOffline="true"

9. Extract all the language cab files KB976933-LangsCab0 through KB976933-LangsCab6, overwrite files if prompted.

10. Launch a command prompt with Administrative privileges.
    

    Let's assume you stored the extracted service pack files in a folder called C:\sp1. Create a new folder called C:\offline, and note the location of install.wim which should be in the sources folder in your Windows 7 installation disc contents. Use the following commands (change folder names where necessary:
    

    DISM /Mount-Wim /WimFile:C:\win7-contents\sources\install.wim /Index:1 /MountDir:C:\offline
    DISM /Image:C:\offline /Add-Package /PackagePath:C:\sp1
    DISM /Unmount-Wim /MountDir:C:\offline /Commit
    

TODO: add instructions for creating bootable disc

Try resetting Windows Update's components.

Since that didn't work, run the System Update Readiness Tool which will check your system for any problems and fix them if possible.

Once that's done, check this file for any errors: c:\Windows\Logs\CBS\CheckSUR.log If it indicates there were none or it fixed them, try installing SP1 again. If it indicates errors, post them and we can take a deeper look into what's going on. You might need to reinstall a particular update, or fix missing components of WIndows.