I ran into the following situation about a month ago and then again today. I was attempting to install SP1 on a windows 2008 r2 server but shortly after the install started it would fail. The Microsoft troubleshooting was pointing to a problem with the partition or the disks themselves. I went through the different steps that Microsoft recommended without success. At one point, one of the steps rendered the server unbootable; thank goodness it was a VM and I had taken a snapshot!!! After looking on the true microsoft knowledgebase, Google, I wasn't able to find anything and broke down and called Microsoft support. Once I mentioned to support I had Snapdrive installed on the server, she found a reference to that being the issue. Evidently, when Snapdrive is installed it "takes control of how a drive/volume" is presented to the operating system. This process works wonderfully all the time except when installing SP1. She indicated that Microsoft assumed the operating system had direct access to the C drive when they created SP1, which apparently they don't. So here is the fix:
1) uninstall snapdrive
2) open command prompt using the RUN AS ADMINISTRATOR option (not sure how neccessary, but this is what I did)
3) run command mountvol /E
4) restart server and install SP1
5) reinstall snapdrive
Hope this helps someone. I know I burned several hours tracking down this small little nugget of knowledge.