Thanks for posting here.  

From the description, I understand the issue is that you received the error
"Setup has encountered an error and cannot continue." when trying to
install the R2 disk. If I am off base, please don't hesitate to let me know.

It seems you upgrade your server to R2, If so, according to the less error
message in R2 setup log, After my research, I can not draw accurate
conclusion about the error message.

I.To isolate the issue, I suggest that you temporarily disconnect the SBS
server from the internet and perform a clean boot on the server. A Clean
Boot will allow us to isolate any device drivers or programs that are
loading at startup that may be causing a conflict with other device drivers
or programs that are installed in your computer.

You may run the following steps to perform clean boot:

a. Click Start, and then click Run.

b. In the Open text box, type MSCONFIG then click OK.

c. On the System Configuration Utility window, click the Startup tab and
click the "Disable All" button to remove the checkmarks from each line in
the list.

d. Then, click the Services tab, add a checkmark to the "Hide All Microsoft
Services" item then click "Disable All".

Note: This disables all third party service items.

e. Click the OK button and restart your computer. Please ensure that all
the third party related services are stopped (services.msc) on the SBS
server.

f. Then please install again to see if it helps.

 II.If issue persist, Please mail me the following logs for analysis:

1.R2_setup.log

2. C:\Windows\svcpack.log

3. C:\Windows\KB885918.log

4. All files under the folder  C:\Program Files\Microsoft
Integration\Windows Small Business Server 2003\Logs

5. Please collect the Setup MPS report for analysis:

a. Please download the MPSRPT_SETUPPerf.EXE from the following link and
then run this tool on server to gather some information from the
problematic computer:
http://www.microsoft.com/downloads/details.aspx?familyid=cebf3c7c-7ca...
88b7-f9c79b7306c0&displaylang=en

b. Double-click on the MPSRPT_SETUPPerf.EXE file.
[Note] This process may take some time; however, it will not have a
negative effect on the performance.

c. A CAB file will be generated in the
%systemroot%\MPSReports\Setup\Reports\Cab directory called
%COMPUTERNAME%_MPSReports.CAB. The CAB file will contain the reports
generated by the MPS Reporting Tool.

d. Please send the result file(CAB file)to me at v-ja...@microsoft.com, and
I can do more research for your issue.
can you mail the log file to me at v-ja...@microsoft.com.

Please zip all the files and sent to me at v-ja...@microsoft.com

I appreciate your time. I am happy to be of assistance to you and look
forward to your reply.

Best regards,

Jacky Luo (MSFT)
Microsoft CSS Online Newsgroup Support

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