When you attempt to add a Windows component to your Windows XP SP1 installation, setup prompts you for the XP1 CD-ROM or the I386 folder? If you installed Service Pack 1 by running update.exe from a network share AND the distribution folder did NOT contain an I386 sub-folder, you will experience this prompt, because Setup tries to locate the I386 sub-folder.
To workaround this problem, press OK and specify the location of the extracted service pack source files.
The proper way to set up the distribution folder is: (This example assumes that you downloaded xpsp1.exe to C:\WinXPSP)
C:\Winxpsp\xpsp1.exe /x:c:\Winxpsp\i386 /u