Microsoft's Aaron Stebner details the issue that is causing Extender setup to fail on some XP SP3 installations and while the eHome team work on an update he has a manual workaround to resolve the issue

Root cause of the issue

I looked in the source code for this installer, and at this stage of setup, it is trying to verify that Windows hotfix KB895961 (codenamed the "Sessions QFE" in the log file snippet above) is installed on the system by checking the following registry value:

[HKEY_LOCAL_MACHINE\SOFTWARE\Microsoft\Windows NT\CurrentVersion\HotFix\KB895961]
Installed=1 (REG_DWORD)

In Windows XP SP3, the code that is a part of this hotfix is a part of the service pack and no longer needs to be installed via a separate hotfix package.  As a result, that registry value ends up getting deleted by the XP SP3 installation process.  To complicate things, it is not possible to simply re-install the version of the KB895961 hotfix package that is available as a prerequisite during Update Rollup 2 for Windows XP Media Center Edition 2005 setup because that package only allows installing on Windows XP SP2.

Head over to his blog to read the solution, considering the amount of time SP3 has been in testing it's amazing that this got missed but it happens and at least there is a workaround and when was the last time I got to write about XP Media Center!

Aaron Stebner's WebLog : Possible issue running Xbox 360 PC setup on a Window XP SP3 system with Media Center 2005 installed