pito
The folder to enter is the folder that contains the subfolders : drivers, examples, hardware, java, lib, libraries, reference and tools.
The code checks whether the file "[provided folder]/hardware/Arduino/boards.txt" exists. If that file is not found you will get the message you described with the red cross.
Note on non windows systems this will never work (I tested it). On windows (XP and 7) systems it works.
I hope this helps you out.
Best regards
Jantje