Several programs can cause this inability to backup atapi.sys when trying to install SP2. This tutorial explains the error and how to correct it.

Multiple people are reporting that they are getting “atapi.sys” errors during the installation of XP SP2.

This error is caused by programs that create virtual hard drives on your system such as Daemon Tools and Alcohol.

If you see this error, cancel the installation and disable these programs. For me, turning off Alcohol was enough. Other users have reported that they had to completely uninstall these types of programs before installing SP2.