A while ago I asked for help tracking down what appeared to be a bug in Microsoft Office System 2003's Local Installation Source (aka: LIS, codename: LocalCache) feature that meant the Windows Installer still required the original source media when patching. Many people answered my plea and with their help at least one of the bugs causing the problem was tracked down and killed. It has been a while since I got back to this issue and people continue to send me requests for help so I thought I'd post a follow up that tries to summarize everything that I know about the issue at this point in time.
First, all of the issues related to LocalCache that I will cover here apply only to Office 2003. Office XP and any version of Office before that do not have the LocalCache feature. If you are having issues with Office XP or earlier the only useful piece of information I have for you is my next point.
Second (and I seriously considered making this my first point), if you have reached the point where you are being prompted for the original source media (for example, the Office installation asking for SKU011.CAB) then you will have to find the source media. I am very sorry but I know of no way to get back into a good state without providing the original source media for your copy Office. Over the last few months, I have heard many tales of loss and despair where the common theme was no longer having access to the original CDs and/or network installations. You have my sympathies but all I can offer now is that this problem has renewed my desire to solve the issue at the root cause (the installation technology itself). At least, in the near future expect an explanation here about what causes the source media prompt and why LocalCache came to be.
Third, after you have found the original media I would suggest enabling the LocalCache using the Local Installation Source Tool (listool.exe). I discussed the listool.exe in more detail in a previous blog entry. I suggest using the listool.exe to get back in a good state because it does a number of checks to make sure that your LocalCache is valid. After using listool.exe to fix your LocalCache, you should not see a prompt for the source media again assuming two things: you do not clear the cache yourself and you install Office 2003 SP1. See the next two points for more details.
Fourth, many people that contacted me about Office 2003 requiring the original source media during patching had cleared their LocalCache. There are many ways to clear the LocalCache but three seemed to be most common. First, you can check the box at the end of the Office installation that said, "Delete installation files". Second, you can use the Disk Cleanup Tool and check the "Office Setup Files" box. Finally, you could delete the "MSOCache" directory that appears on one of your drives (note: playing around with this directory is highly discouraged). To be clear, clearing the LocalCache makes it almost certain that you will be prompted for the original source media during patching or other repair operations. That is why I highly recommend using the listool.exe to ensure LocalCache is enabled and then do not clear the cache.
Fifth, you need Office 2003 SP1 to kill off a bug that was causing the LocalCache to inadvertently be cleared. K tracked this down to a case where if rollback occurs during repair or patching (due to an error or user cancel) then too many files could be removed from the cache. The goal was to have only the files requested to the cache for repair or patching to be removed when a rollback occurred. But the bug caused all files necessary for the repair or patching to be removed. The first file to be removed is usually the SKU###.CAB (for example, SKU011.CAB) that is almost always needed for any repair or patching operation. K fixed the bug in Office 2003 SP1 by just removing the code since caching files during a repair or patching is an edge case and it is very difficult to correctly calculate which files were added to the cache during the repair or patching operation. It is safer to leave a couple extra cabinets in the cache than to remove too many cabinets.
Finally, if you'd like more help trying to fix your LocalCache I suggest checking out the microsoft.public.officeupdate newsgroup. There is some great information out there. In particular, I find this post, this post, and this post are particularly pertinent. Sloan Crayton was the Product Support Services (PSS) engineer I worked with for a number of years in Office and I have kept him in the loop with all the information I've gathered from my blog here. He usually has the best answers for any of your Office installation issues.
Best of luck and check back here in the future if you'd like the story behind LocalCache (and how it was supposed to help prevent source media prompt problem).