installation and failed on the system checkup
After much searching, the culprit was actually IBM websphere which somehow inserts a line into "HKEY_LOCAL_MACHINE\SYSTEM\CurrentControlSet\Control\Session Manager\PendingFileRenameOperations. "
Apparently WS tries to remove this file "C:\Documents and Settings\LocalService\Local Settings\Application Data\javasharedresources\C230D1A32_webspherev61_G01". Only God knows why the file is there in the first place.
Refer to this link for more info
After removing the entry, Installation continues but SQLServer Express failed to start up because of this issue.
FileMgr::StartLogFiles: Operating system error 2(The system cannot find the file specified.) occurred while creating or opening file 'e:\sql10_main_t\sql\mkmastr\databases\objfre\i386\modellog.ldf'. Diagnose and correct the operating system error, and retry the operation.
Ended up uninstalling and reinstalling SQLServer Express to fix this. Refer to this link. Again one of those "unresolved mysteries in Computer Science."
BINGO!!.. after a second try, all is good and SQLServer Express 2008 is finally running