When you originally install SQL server, where did it install from? perhaps it's looking for the original MSI? I've seen issues where a custom installer was used and applying updates became somewhat problematic, without access to the original installer. This was with previous versions however...

I would think that this would be a covered support call to MS although they may just direct you to install SP1 for SQL 2008 instead. Any reason why you are installing CU1 instead of SP1?

-Luke.