Wow, more digging and here is what I found...
1. Click Start - Run - Type regedit and press enter.
2. Navigate to
*HKEY_LOCAL_MACHINE\Software\Microsoft\Windows\CurrentVersion\Setup
HKEY_LOCAL_MACHINE*
\Software
\Microsoft
\Windows
\CurrentVersion
\Setup
3. In the right pane, Right-click and select New - String value
4. Name it as BootDir and set its value to C:\
This should help. Try installing SP3 and should work fine.