Finally and after astounding 5.5 hours VS SP1 was installed...
However it wouldn't be possible without mounting iso image as a drive using PowerISO.
Installation would hang when ran from the dvd drive (the drive itself is just fine).
I've never before encounter any issues whatsoever with ms installers/updates/sp/etc so it's kind of odd...

Anyway, it's done so I was able to install SQL Server 2008 without any problem.