Its probably happening when it is trying to create a Windows system restore point.
See if doing this cures the problem. your system restore Available disk list may look slightly different, remove the entry labeled (missing)
Click Start, type SystemPropertiesProtection.exe. The System Restore Properties window will open.
You may see two C: drives in the listing with the same Volume label (see figure below). Deselect the checkbox for the duplicate volume, and enable the checkbox for the correct drive (the one with Windows logo).
If this is not the case, turn off system restore, then turn it back on, try SP1 again.
If no Joy, disable your Security Software during the installation of SP1 by doing a clean boot, open msconfig:
Click the Startup Tab and uncheck everything
Click the Services tab.
Click to select the Hide All Microsoft Services check box.
Click Disable All, and then click OK.
When you are prompted, click Restart, then install SP1
You can revert the msconfig changes after SP1 is installed successfully.