I have been staring at the error now for the past few days.  I just received this Xbox this week.  I have a Vista 32 with SP1 loaded. No firewall or Norton/McAfee install ever.  I only use AVG freebie.  Xbox Live works fine.  I have found my exact issues on several forums and no one has a fix. 

I get the error message:
The Xbox 360 was unable to prepare a connection to the Windows Vista Media Center- based PC Restart your Xbox 360 and try again

Steps to re-create my problem:

1 On the Xbox 360, choose the "Media Center" button

2 Write down the "setup key" given by the Xbox 360

3 On the PC, go to tools, setup, extenders and add extender

4 Enter the "setup key" from the Xbox 360

5 At this time, the Xbox 360 changes screens to indicate it's
communicating with the PC. The "Media Center Extender" device driver
successfully installs.

6 When the media center PC gets to the last step of the set-up process, "Connecting to Extender" the XBox outputs the error "The Xbox 360 was unable to prepare a connection to the Windows Vista Media Center- based PC. Restart your Xbox 360 and try again".

7 Several minutes later the PC outputs the error: "Restart the computer and the XBox"

8 The Computer shows the xbox as a "ready to use" extender in media
center

Ok I give up.  I loaded Tversity and let me say Microsoft should be ashamed.  They can't even make their own products work together.

Tversity worked on the first attempt.

gquiring:

I have been staring at the error now for the past few days.  I just received this Xbox this week.  I have a Vista 32 with SP1 loaded. No firewall or Norton/McAfee install ever.  I only use AVG freebie.  Xbox Live works fine.  I have found my exact issues on several forums and no one has a fix. 

I get the error message:
The Xbox 360 was unable to prepare a connection to the Windows Vista Media Center- based PC Restart your Xbox 360 and try again

Steps to re-create my problem:

1 On the Xbox 360, choose the "Media Center" button

2 Write down the "setup key" given by the Xbox 360

3 On the PC, go to tools, setup, extenders and add extender

4 Enter the "setup key" from the Xbox 360

5 At this time, the Xbox 360 changes screens to indicate it's
communicating with the PC. The "Media Center Extender" device driver
successfully installs.

6 When the media center PC gets to the last step of the set-up process, "Connecting to Extender" the XBox outputs the error "The Xbox 360 was unable to prepare a connection to the Windows Vista Media Center- based PC. Restart your Xbox 360 and try again".

7 Several minutes later the PC outputs the error: "Restart the computer and the XBox"

8 The Computer shows the xbox as a "ready to use" extender in media
center

Make sure you are connected to the Internet during the setup process

Make sure you don't use a Domain account on the PC

Remove any fingerprint s/w you may have on your PC (if any)

Make sure you have Vista SP1