SCCM 2007 SP2 upgrade-WAIK corrupt error

I am upgrading from SCCM 2007 SP1 with R2 to SP2 in a test lab environment. I
am running VMs using Virtual PC 2007 SP1. I have a DC running WS2003R2, and a
Site Server and a Site System running WS2008 SP2.

When I run the upgrade from the Site Server, and I reach the Actions list, I
get the following error during the Install SMS Provider Components step:
“Configurations Manager Setup cannot continue because of the following error:
Setup has encountered fatal errors while performing file operations”.

I traced the error to c:\ConfigMgrSetup.log, and there I found “The cabinet
file '' required for this installation is corrupt and cannot be
used. This could indicate a network error, an error reading from the CD-ROM,
or a problem with this package.”

I found in the SmsSetup\Waik directory of my extracted SP2 files,
it is dated 7/16/2009 18:16, 435976kb. I downloaded WAIK for Windows 7, and
also found there dated 7/14/2009 13:10, same size. When I compare
the two files with WinDiff inside my Site Server VM it shows them as
identical. So I cannot believe that there is actual corruption.

Posts like suggests
that this error message can be due to other things, like a lack of disk
space. But my VMs are dynamically expandable up to 64GB, and show more than
40GB free.

I am stuck. How can I get around this error?