Applying service pack will not eliminate the error if it is caused by db compatibility level differences. Mind you, that this may be valid only if you attempt to move from level 8.0 to level 7.0. Also, SP-related problems do not manifest themselves by the error specified. It would be something like "Invalid file name", or something similar.

SPB: can you break your DTS into smaller steps and establish operation flow, so that you can see what step fails? Also, just pick a table and create a DTS to transfer it using same servers. See what happens.