Thanks very much for the heads up everyone!
I've not only managed to slipstream SP2 on a newly created XP (from the I386 dir), but I did something else as well - I created a tailor-made bootable mini-dvd with the following features:
- XP slipstreamed SP2 with various drivers, extras (movie maker, etc) removed but with integrated cumulative hotfixes/security patches up to Jan 25, 2006
- integrated self-installed IBM's chiputils for 745 chipset (installs without user prompts)
- integrated self-installed IBM's software installation utility (installs without user prompts)
- added all updated IBM Thinkpad drivers (and 3rd party software from my original backup)
I can now use the mini-dvd to boot into XP installation and perform an automated install of Windows XP SP2 without user prompts at all - everything from time zone, to the way my shortcuts behave, to how much space is allocated for system restore. I managed to tweak the installation enough to remove unnecessary drivers and other MS add-ons (got rid of all the bloatware and unnecessary languages) and include a master directory containing IBM's most recent drivers and all the 3rd party software that originally shipped with my T-pad. All I need to carry around with me as a backup is a little tiny mini-dvd.
This method really isn't intended for those unacustomed with code writing but the results are great and the product fantastic. Here are sites I used as reference to create this little dvd:

the following is NOT a set of instructions for what I did. I merely used these sites as reference to create a tailor-made IBM WinXP SP2 install for my T42!!! You will NOT find anything illegal in these sites.
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http://www.4saad.com/WhatsNew/Fresh_XP_ ... /index.htm (main idea site)
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http://forum.thinkpads.com/viewtopic.php?p=90510#90510 (thisrob's thread)
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http://www.tacktech.com/display.cfm?ttid=313
- Find your current XP key by looking in this
How To
- slipstreaming, tweaking made easy using
nLite
- all post-SP2 Microsoft hotfixes are listed
HERE
I used
VMWare Player (free download) and this set of instructions
HERE to test my final product on my own laptop before committing to the final re-installation of WinXP.
Over the course of my research and testing I noted the following issues:
- If you have XP running on your thinkpad, the install serial number is dug in somwhere in WinXP which you can extract and use for a re-installation of WinXP (as long as the XP you're running isn't bootlegged). If it's not in the "unattend.txt or unattend.GOL" files, use the method I pointed out in the URL above. It will find it for you - regardless this is the only key you should use! You can use that with any combination of install.
Example 1: you got your thinkpad and it's preloaded with XP SP1 - your key is valid and WILL WORK FLAWLESSLY if you decide to slipstream XP with SP2 later on.
Example 2: you received your Thinkpad with SP2 installed, but you want to make yourself an XP disk. Use the method mentioned above to obtain your current WinXP key. IT WILL WORK FLAWLESSLY.
- Your XP key will NOT work on a vmware test on another machine - only on a thinkpad laptop (so download and use the free vm player noted above). The OEM version of XP has a BIOS verification utility integrated in the OS and checks for the presence of IBM code in the BIOS. If it does not find this info no MS Windows key will work in its stead.
- As stated in the set of instructions linked in the first post: make sure you install IBM's chip installation utility before installing any other drivers - this tweaks all subsequent driver and software installation to perform better on your Thinkpad.
... if something else comes up I'll add to this post.