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If you are still experiencing problems or for anyone else with the same issue, a solution was found for the same error here:

http://answers.microsoft.com/en-us/windowslive/forum/gallery-wlinstall/i-am-getting-error-0x80040705-and-says-source/59e51261-060e-453f-9c50-23c62b3115f0?msgId=bdd76a8a-8fa2-4db6-85b6-1c7709bc3a23

This issue typically occurs if some of the files from your previous installation are already installed in your system but the installer cannot overwrite them or your Windows operating system is outdated and it conflicts with the installer. To troubleshoot this issue, we recommend that you perform the following steps below:

1. Perform Windows update by clicking this link.

Note: Updating your operating system will improve the reliability, security, speed of your computer and it may also fix some issues that are related to Windows Essentials.

2. Uninstall Windows Essentials by following the instructions from this link.

3. Browse your computer to:

C:\Program Files then delete the Windows Live folder if available.
C:\Program Files\Common Files\. Delete the folder Windows Live on this location
.

4. Temporarily disable third party firewall.

Note: Disabling the firewall may make your computer or your network vulnerable to attack by malicious users or by malicious software such as viruses. Please make sure that you do not have any other Internet Explorer window open or any other programs running while trying to install Windows products. Once, you are able to install our services, please turn your firewall back on.

5. Reinstall Windows Essentials using this offline installer then restart your computer and check if the issue still occurs.

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