It seems that when running Windows XP SP3 many people are having issues installing windows live applications using the windows live installer. After much googling I have come across a solution. This also solves issues that exist with the windows update service after installing SP3.
Essentially what you need to do is:
1. Download and run the Windows Live Installer Cleanup tool from:
http://download.microsoft.com/download/2/3/0/23036331-516d-4c7e-b9ac-31554a2fec06/WL-Beta-remove.zip
2. Reboot
3. Click START>Run and type 'command' to load the console.
4. Type in:
regsvr32 wups2.dll
and press enter.
5. Type exit to leave the console
6. Download and run the windows live installer, it should now work perfectly.
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