This was an interesting one.  I saw two instances of this during VS Beta 2.  It was rare enough that debugging it was nearly impossible.  Unfortunately, the dev on the MS security team that was helping me debug this was pulled back to working on Vista and wasn't able to find out what the real problem or solution was.

When installing VS, VS fails and in the logs, it fails on the custom action CA_SetPidProps.  Debugging this, it turns out the CryptProtectData API (a Windows Security API) is failing.  During the installation process, we need to encrypt some data and if that fails, VS setup will fail.

Our Product Support Technician just ran into another repro of this issue.  After a week, many phone calls, emails, and a lot of frustration and collaboration with three different teams, he was able to figure out a workaround.

If you run into this issue, look in your c:\windows\system32\microsoft folder.  If there's a zero byte file in that directory called Microsoft, delete it and then reboot your machine.  Windows will then write the right data and your Crypto APIs should function normally after that.

Huge Kudos to Will for figuring out a workaround.  We still don't know how the operating system gets into this funky state but atleast we now know of a workaround.