That problem usually indicates that .Net Framework is damaged on your PC.
To repair .Net Framework 2.0 on XP:
Open Control Panel
Select Add or Remove Programs
Locate Microsoft .Net Framework 2.0
Select the entry and when the installer launches, select Repair.
Reboot when it completes.
Alternatively, see this KB article:
http://support.microsoft.com/kb/306160
To remove a corrupt .Net Framework install, use this tool:
http://astebner.sts.winisp.net/Tools/dotnetfx_cleanup_tool.zip
The download of .Net Framework 2.0 can be found here:
http://www.microsoft.com/downloads/details.aspx?familyid=0856eacb-4362-4b0d-8edd-aab15c5e04f5&displaylang=en
To repair .Net Framework 2.0 and 3.0 on Vista, see this blog entry:
http://blogs.msdn.com/astebner/archive/2007/03/26/how-to-repair-the-net-framework-2-0-and-3-0-on-windows-vista.aspx
Note that after repairing or reisntalling .Net Framework, you will need to reapply the .Net Framework 3.5 SP1 update via Windows Update.
If the above does not resolve the problem with OneCare, please contact support:
How to reach support (FAQ) - http://social.microsoft.com/Forums/en-US/onecareinstallandactivate/thread/30400b52-7f26-4ba0-bc18-17e305329d90
-steve
Microsoft MVP Windows Live / Windows Live OneCare & Live Mesh Forum Moderator