1. If you have Windows installer 3.1 installed already, uninstall it. This can typically be done from the Add/Remove programs section in the Control Panel. Check the box for 'Show Updates'. Find the item in the list, and click on 'remove'.You may have to reboot once finished.
2. Download Intall the Windows Installer from the Microsoft Download site. You will have to validate your copy of windows to download the package.http://www.microsoft.com/downloads/details.aspx?familyid=889482fc-5f56-4a38-b838-de776fd4138cdisplaylang=en

3. Install Windows Installer 3.1 that you downloaded. You may have to reboot.
4. Try windows update again, it should resolve the error.