Looking in the Event Log I also found this entry around the time the error message was generated;
The installation of C:DOCUME~1…LOCALS~1TempZNWA0VS80sp1-KB926601-X86-ENU.msp is not permitted due to an error in software restriction policy processing. The object cannot be trusted.
After doing a bit of research I came across others who had experienced the same problem and they directed me to this Knowledge Base artcile http://support.microsoft.com/default.aspx/kb/925336 which provided the solution. After applying the update and rebooting the server I was able to install the Service Pack.