I cloned one VM from an ESXi 4.0 host to an ESXi 5.0 U1. When I tried to upgrade the VM tools (interactively), I got an error saying “Error 1316. A network error occured while attempting to read from the file C:\Windows\Installer\VMware Tools.msi”.
At this point, just click OK, open a command prompt with Administrator’s privileges and type:
C:\users\username> D: D:> setup /c
This command will delete some orphaned registry entries and after the command completes, which is less then a second, just do your standard VM tools upgrade by double-clicking the setup.exe icon.
Source: VMware KB 1012693