SOURCE: http://support.microsoft.com/default.aspx?scid=kb;en-us;884675

When you try to install one of the following programs, the installation stops:
Microsoft Windows XP Service Pack 2 (SP2)
Microsoft Windows XP Tablet PC Edition 2005
Microsoft Windows Server 2003 Service Pack 1 (SP1)

Additionally, you receive the following error message:

Copy Error
Setup cannot copy the file Atapi.sys
Ensure that the location specified below is correct, or change it and insert 'Windows XP System Files' in the drive you specify.
Note Do not click Retry or change the Copy file from location if you receive this error message.
 
CAUSE
This issue may occur if you have one of the following programs installed: • Alcohol 120%
For more information about Alcohol 120%, visit the following Alcohol Software Web site:
http://www.alcohol-soft.com/ (http://www.alcohol-soft.com/)
• DAEMON Tools
For more information about DAEMON Tools, visit the following DAEMON Tools Web site:
http://www.daemon-tools.cc/dtcc/portal/portal.php (http://www.daemon-tools.cc/dtcc/portal/portal.php)
These programs lock the Atapi.sys file and prevent Windows XP SP2 or Windows Server 2003 SP1 from backing up the existing version of the file.
 
WORKAROUND
To work around this issue, follow these steps:
1. In the error message dialog box that is described in the "Symptoms" section, click Cancel. You then receive the following message:
Do you want to continue Setup without copying this file?
2. Click No. The Windows XP SP2 installation will roll back to your earlier Windows installation.
Note If you click Yes, the Windows XP SP2 Setup program will continue without creating a backup copy of the Atapi.sys file. If you later remove Windows XP SP2, the Atapi.sys file will not revert to the earlier version, and your Windows XP-based computer may become unstable.
3. Remove the programs that are described in the "Cause" section.
4. Install Windows XP SP2.
5. Reinstall the programs that you removed in step 3

 
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