I just went through this problem myself, albeit with the Gamersgate version of Arma2. After much hand-wringing and hair-pulling (not to mention forum searching), I did the following. Note that not all of this was probably necessary to make the 1.05 patch install properly, but at least one of the steps obviously cured the problem:
1. De-installed Arma2 and removed all the registry entries related to Bohemia Interactive/Arma2 from the registry via Regedit.
2. Ran disk defragmenter on my hard drive.
3. Reinstalled Arma2 without patching. When installing, I let Arma2 install to the default path on my HD it wanted: in my case, C:\Program Files\Bohemia Interactive\ArmA 2. My previous failed patching attempts happened when I'd installed to a different custom directory...I have no idea if that was significant, but I thought I'd play it safe this time.
4. Ran the campaign up until the first save point on the ship, then exited (this was suggested in another thread here in the tech support forum).
5. Downloaded the 1.04 patch. Installed it. No errors here.
6. Finally, installed 1.05, held breath, crossed fingers and toes, sacrificed a rubber chicken to the dark gods, etc. etc. Installed with no errors. Whew! :bounce3:
I'm running windows 7 64-bit edition, by the way. Seems 64-bit users of all Windows varieties are having the most trouble with this.