I'm facing a similar situation as well and am a bit lost about how to solve it.
I have an Airport base station that is functioning fine, and a time capsule that is extending the network from the base station and until two days ago had my AirportExpress (current edition - probably six months old) extending the network of the base station, working without any problem.
Now the unit has a flashing amber light and an error message in the Airport Utility that says the unit cannot extend the network. The unit is working however with Airplay...
I restarted the unit, which didn't solve anything and then restored it to default settings, which didn't work either...
Any other suggestions would be greatly appreciated...