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:
3. Click START>Run and type 'command' to load the console.
4. Type in:
and press enter.
5. Type exit to leave the console
6. Download and run the windows live installer, it should now work perfectly.