We have updated the KB that deals with this error to include a new script to get users out of the 0xc0000034 condition and allows SP1 to install properly. This fix will only work for users who are currently in a 0xc0000034 state after applying Service Pack 1 for Windows 7 and Windows 2008 R2. The information in this post applies to Windows 2008 R2 and Windows 7 ONLY and should not be used on other Windows installations.
The KB is located here: http://support.microsoft.com/kb/975484
I want to use this post specifically as a means to track how this is working for users and what issues (if any) you might encounter when running the script.
Please note, this will NOT WORK for users who have used the registry or pending.xml workarounds noted in the following blog entry and are in a torn state (ie. system will not update to SP1): http://blogs.technet.com/b/joscon/archive/2011/03/09/error-0xc0000034-during-service-pack-1-installations-for-windows-7-and-windows-2008-r2.aspx .
NOTE: It SHOULD work on machines that deleted and recreated the SetupExecute value and are still getting the 0xC0000034 error on boot.
IMPORTANT: The Windows 7 / Windows Server 2008 R2 Service Pack 1 updates available on WSUS have been revised to ensure that these updates are installed exclusively. We are making this change in response to the issue described in KB975484. Previously, Service Pack 1 could be installed at the same time as other updates. While this change does not fully resolve the issue, it will help prevent it from occurring. Note that users must also reboot their computers after installing Service Pack 1 and before scanning for or installing other updates.
If you're planning on opening an issue with SP1 for this, please try and gather the following information before you call, it will greatly help us in working on the issue:
\Windows\system32\config\COMPONENT and SYSTEM (files)
> dir /s /b %windir%\winsxs > %computername%_winsxs.txt