Problem is resolved. From a couple hits I got googling, I got some leads.
In case it helps someone else:

It seems to have been to a file permissions problem. I found could not
access some of the folders in the documents and settings\all users path.
Specifically there was a folder called "documents", where access was being
denied from all my accounts. Looking under the security tab, no accounts
had permission to access this folder at all; so I set up permissions under
the security tab. When I clicked "apply" - this "documents" folder simply
vanished -- poof! gone from the directory list... SP3 installed fine
afterwards. I should have done error checking on the drive, but didn't.

Bill

On Fri, 09 May 2008 16:23:39 GMT, Bill wrote:

> Hi,
> During installation of the SP3 update (manual update) I see the following
> error:
>
> "An Error occurred while copying file beethov9.wma.
> Cannot copy file to destination directory.
> Click Retry to retry operation Click cancel to..."