diff --git a/Sources/libhostmgr/Platforms/VMManager.swift b/Sources/libhostmgr/Platforms/VMManager.swift
index e00352d9..aabfce7e 100644
--- a/Sources/libhostmgr/Platforms/VMManager.swift
+++ b/Sources/libhostmgr/Platforms/VMManager.swift
@@ -55,15 +55,32 @@ public struct VMManager {
     /// Unpack a packaged VM
     ///
     /// This method expects that the packaged VM is located in the `vm-images` directory – referencing it by name
-    /// will attempt to unpack the VM at that location. If there is no packaged VM at that location, this method will
-    /// emit an error.
+    /// will attempt to unpack the VM at that location.
+    /// - If there is no packaged VM at that location, this method will emit an error.
+    /// - If an extracted VM already exists at the final destination path, this method will emit an error.
+    /// - If an error occurs, this method will attempt to clean up any extracted files.
     public func unpackVM(name: String) async throws {
+        let finalDestination = Paths.toVMTemplate(named: name)
+
+        guard !FileManager.default.fileExists(atPath: finalDestination.path) else {
+            throw CocoaError(.fileWriteFileExists)
+        }
+
+        let tempDirectory = FileManager.default.temporaryDirectory
+            .appendingPathComponent("hostmgr-vm-unpack-\(name)-\(UUID().uuidString)")
+
+        defer {
+            try? FileManager.default.removeItem(at: tempDirectory)
+        }
+
         try Compressor.decompress(
             archiveAt: Paths.toArchivedVM(named: name),
-            to: Paths.toVMTemplate(named: name)
+            to: tempDirectory
         )
 
-        try VMTemplate(at: Paths.toVMTemplate(named: name)).validate()
+        try VMTemplate(at: tempDirectory).validate()
+
+        try FileManager.default.moveItem(at: tempDirectory, to: finalDestination)
     }
 
     /// Package a VM for use on other machines
diff --git a/Tests/libhostmgrTests/Platforms/VMManagerTests.swift b/Tests/libhostmgrTests/Platforms/VMManagerTests.swift
new file mode 100644
index 00000000..9efc805c
--- /dev/null
+++ b/Tests/libhostmgrTests/Platforms/VMManagerTests.swift
@@ -0,0 +1,92 @@
+import XCTest
+import Foundation
+@testable import libhostmgr
+
+final class VMManagerTests: XCTestCase {
+
+    /// Test that unpackVM throws the correct error when a VM already exists at the destination
+    func testUnpackVMThrowsWhenVMAlreadyExists() async throws {
+        let vmName = "test-vm"
+        let expectedVMPath = Paths.toVMTemplate(named: vmName)
+
+        // Create the destination directory to simulate an existing VM
+        try FileManager.default.createDirectory(at: expectedVMPath, withIntermediateDirectories: true)
+        defer {
+            try? FileManager.default.removeItem(at: expectedVMPath)
+        }
+
+        let vmManager = VMManager()
+
+        do {
+            try await vmManager.unpackVM(name: vmName)
+            XCTFail("Expected CocoaError.fileWriteFileExists to be thrown")
+        } catch let error as CocoaError {
+            XCTAssertEqual(error.code, CocoaError.fileWriteFileExists)
+        }
+    }
+
+    /// Test that unpackVM throws an error when the source archive doesn't exist
+    func testUnpackVMThrowsWhenArchiveDoesNotExist() async throws {
+        let vmName = "non-existent-vm"
+        let vmManager = VMManager()
+
+        do {
+            try await vmManager.unpackVM(name: vmName)
+            XCTFail("Expected error when archive does not exist")
+        } catch {
+            XCTAssertTrue(true, "Should throw error for missing archive")
+        }
+    }
+
+    /// Test that temporary directories are properly cleaned up when unpackVM fails
+    func testUnpackVMCleansUpTempDirectoryOnFailure() async throws {
+        let vmName = "test-vm-cleanup"
+        let vmManager = VMManager()
+
+        do {
+            try await vmManager.unpackVM(name: vmName)
+            XCTFail("Expected unpack to fail due to missing archive")
+        } catch {
+            // Verify that no temporary directories remain after failure
+            let tempDirs = try FileManager.default.contentsOfDirectory(
+                at: FileManager.default.temporaryDirectory,
+                includingPropertiesForKeys: nil
+            ).filter { $0.lastPathComponent.contains("hostmgr-vm-unpack-\(vmName)") }
+
+            XCTAssertTrue(tempDirs.isEmpty, "Temporary directories should be cleaned up on failure")
+        }
+    }
+
+    /// Test that when unpacking an invalid archive fails, no folder is left at the final destination
+    func testUnpackVMDoesNotLeaveDestinationFolderOnInvalidArchive() async throws {
+        let vmName = "test-invalid-archive"
+        let archivePath = Paths.toArchivedVM(named: vmName)
+        let finalDestination = Paths.toVMTemplate(named: vmName)
+
+        // Create an invalid archive (just a text file instead of proper .aar format)
+        try FileManager.default.createDirectory(
+            at: archivePath.deletingLastPathComponent(),
+            withIntermediateDirectories: true
+        )
+        try "invalid archive content".write(to: archivePath, atomically: true, encoding: .utf8)
+
+        defer {
+            try? FileManager.default.removeItem(at: archivePath.deletingLastPathComponent())
+            try? FileManager.default.removeItem(at: finalDestination)
+        }
+
+        let vmManager = VMManager()
+
+        // Verify destination doesn't exist before attempting unpack
+        XCTAssertFalse(FileManager.default.fileExists(atPath: finalDestination.path))
+
+        do {
+            try await vmManager.unpackVM(name: vmName)
+            XCTFail("Expected unpack to fail with invalid archive")
+        } catch {
+            // After failure, verify no folder was left at the final destination
+            XCTAssertFalse(FileManager.default.fileExists(atPath: finalDestination.path),
+                          "Final destination should not exist after failed unpack")
+        }
+    }
+}