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From the knowledge base:
Please refer to Microsoft information:
Search the page for 1706. Problem can occur if trying to install over a CD install with an administrative image where the CD installation is compressed and the Administrative image is expanded.
There is also this one:
The upgrading of an installation of SolidWorks requires the same installation files (in particular the .msi file) to upgrade an installation. This has always been a Windows® Installer (Microsoft® Installer) limitation. A service pack cannot be applied and use the .msi file located on the SolidWorks 2008 media even if they are the same version of the original installation. Trying to change the .msi file will most likely result in an Error 1706. If the original installation files have been moved to another drive/folder location browse to them and use them to service pack the installation.
To apply a service pack without the original source (.msi) files, either re-install SolidWorks from the DVD media and then service pack the installation (with the media), or download the full Solidworks 2008 SPX.X upgrade files (this is possible by having the 'download packets' option DISABLED in the 2008 Installation Manager). Once the full files are downloaded the DVD or original installation files will not be needed. Please note this can take some time since it will be a full installation of all necessary files.
Not sure if either of these will help or not.