I've encoutered the same problem and checking the KB947864-IE7.log reveals the following: AnalyzeForBranching: files installed on target workstation are from sp3bta branch which is incompatible with sp2gdr branch .. .. .. KB947864 Setup encountered an error: Files from the package are incompatible with files on your system. I'm not sure whether this is a Microsoft issue with this update, or an nLite issue. I'm using the SP3 RTM, so there should be nothing related to sp3 beta. (Unless MS screwed up...)
