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SP1 Won't Install

Hello Experts

I have a 2008 R2 server that used as a Domain Controller,
Until a week ago the server use to be in a WSUS servers group that receive updates from it.
I have notice that the server 2008 R2 SP1 didn't installed on the server (error 8007000d).
I have tried several things to solve this, including:
1. Toke the dc server out from the wsus server.
2. Cleaning the "software distribution" folder that holds the downloaded and yet installed updates from the WSUS.
3. Manually installing the SP1 (got error 80070490d).
4. Run the sfc /scannow command to see if the system files are corrupted (they are fine).
I have read in a post from Microsoft about this error :
http://windows.microsoft.com/en-US/windows7/Windows-Update-error-80070490 
It says that the solution is to perform an in place upgrade,
I don't know if this step is necessary.

Waiting for your advices.
thank you.
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rindi
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Hi crindi:

I can't see the relevant between my question and your answer,
What's the connection between the 100 MB system reserved partition and the fact that i can't install the SP1?

f.y.i
The server is a virtual machine.
The SP1 installation needs some free space on the small boot partition to install. If there isn't enough empty space in that partition it'll fail.
as you can see from the attachments the size of the system reserved partition is the same in the problematic DC and my other DC.
Problematic-DC.jpg
Working-DC-Disk.jpg
Hi Neilsr:

the  system readiness has installed succsesfully
but when i tried to install the  KB967723, i get error that says:
"the update is not applicable to your system"
i installed the x64 bit version.
I would still resize it. That has helped me in similar situations. As you are using a VM there should be no problems using the PartedMagic LiveCD.
Hi rindi:

would Acronis work ?
Acronis what? Depends on which Acronis tool and whether it is a server version or not.
Acronis Backup & Recovry 10
I don't think that has an option to resize and move partitions. As far as I know it is just for backing up.
so increasing the partition to say 300 MB will make the system get the SP1 without error ?
is there any other steps that i need to do after the re size ?
I can't guarantee it, but that was what helped in me. Also unhide and give the partition a drive-letter for the time you are installing the SP (once finished you can remove the Letter again and hide the partition).
thx