I'm curious to hear from people that are hitting or have hit this issue. Leave a comment or contact me directly through my blog.
 
The issue here is often that %windir%\system32\mscoree.dll is not updated as part of the install. Behing the scenes of the installer, .NET 4 is trying to install an update to the OS and that it depends on but Windows Update. Windows update is telling the .NET 4 installer that the update is not applicable to the machine. The .NET 4 installer treats this response to mean that is not needed and moves on. In general, if Windows update is returning "not applicable" for and update one of wo things is true. Either its not applicable, or something is really wrong with Windows or Windows Update and no updates including critical security updates are able to install.
 
So far I have found two root causes of this issue:
 
1. %windir%\servicing\trustedinstaller.exe is not present on the machine.
2. The operating system is not an officially released version of the OS.
 
I'm curious to hear from anyone experiencing this issue. I'd like to know which of this issues it wascor if there is a root cause of this that I have not found.
 
Trouble Shooting/Self Help Instructions:
 
1. %windir%\servicing\trustedinstaller.exe is not present on the machine.
 
If this is the root of your issue. I would recommend following the steps in this article to try to get trustedinstaller.exe put back http://support.microsoft.com/kb/929833 .
If anyone has any idea what would have removed trustedinstaller.exe from their machine, I'd love to hear about it.
 
2. The Operating System is not an officially released version of the OS.
 
You can check this by looking at the version of %windir%\servicing\trustedinstaller.exe or looking in %windir%\logs\CBS\CBS.log. In the log you should see logging lines that look something like this: "Loaded Servicing Stack v6.1.7601.17592".
 
For Windows 7, I would expect to see a version of at least v6.1.7600.16385. If you see a number lower than this on Windows 7, the only way I know of to fix this issue is to do an upgrade to a supported released version of Windows 7. The more important thing in this case is that pre-release OS's do not get updated with critical security patches from Microsoft. Thats not a really good situation to be left in, especially if you dont know it.
 
I've seen many reports of people having a build number of v6.1.7600.16384 which is one number below the released build. I'm really curious how people would have gotten this build of the OS. The fact that its so close to the final build makes me wonder if it could have been accidentally released somehow. Please let me know if you got it through an official supported channel and its the wrong version.

I'd like to thank Mike Lewis for contacting me and helping me find the 2nd root cause. I'd love to hear from anyone else hitting this issue to make sure I can write down all the causes of this for people.