Im back already. Heres my next idea and the thought process behind it. Per your statements, everything installs except Windows Software, lets go with that and see how it goes.
Lets check the OS for any corruption or problems, first
System Files - SFC Command
If it comes up positive run three times to try to repair.

If that comes up negative, try to install something, look at the time. If it does not install, go to search by the start button, type event viewer. In event viewer, put your cursor on administrative in the left panel. In administrative look or any errors or critical, in the right panel at the time of the problem, report back

Do you have the 32 or 64 bit version? Have you tried the full download? Have you tried safe mode? Make sure that you have your antivirus disabled.

Me again, look at this : Extract Files from Vista Installation DVD

Don't worry about the Sidebar errors. I think everyone has those errors , to the best of my Knowledge, I am not aware of a Microsoft fix for the sidebar gadgets errors that show up in the SFC program . But, yanno , starting over again may be the best thing to do. Seems that something got installed wrong or not installed originally when you did this re install the first time. I peeked at the event viewer and I am not sure what that means, maybe Rich does .

Disable any Antivirus application during a service pack installation. The standalone SP2 may work but regular updating wont simply because SP1 is no longer supported by Microsoft.