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)

@echo on
mkdir C:\Winxpsp\I386
C:\Winxpsp\xpsp1.exe /x:c:\Winxpsp\i386 /u
C:
cd C:\Winxpsp\i386
copy new
copy ip
Assuming that a user addresses the distribution drive as I:, they would install the service pack by running:

I:\Winxpsp\i386\update\update.exe \[options\]