Problem found: Code error 05; it turned out there's is no previous NETFramework installed when looked under list of programs from control panel.
Solution: Downloaded and installed previous versions of Net Framework then manually installed 3.5 SP1
Downloaded from here:
Net Framework 1.1Net Framework 1.1 SP1
NET Framework 3.5 SP1
This will also install .Net Framework 2.0 SP2 and .Net Framework 3.0 SP2
Article that helped: http://support.microsoft.com/kb/923100
Additional articles regarding the issue:
http://www.eggheadcafe.com/software/aspnet/35784365/error-code-57-microsoft-net-framework-35-service-pack-1-and-net.aspx
http://social.answers.microsoft.com/Forums/en-US/vistawu/thread/e9499017-39bb-4e4d-ad61-f2db93030908
http://thedailyreviewer.com/windowsos/view/cannot-update-microsoft-net-framework-35-service-pack-1-104286317
http://www.labnol.org/software/tutorials/problem-cannot-install-windows-vista-sp1/2621/
http://support.microsoft.com/kb/929833