The recent release of Microsoft Security Bulletin MS11-100 KB2656353 might fail on Windows XP/Windows 2003 systems.

The patch will fail with an error message: “Microsoft .NET Framework 1.1 -- Internal Error 2705. Directory”

In fact, if you try to repair existing .Net Framework 1.1, you would receive the same error message: “Microsoft .NET Framework 1.1 -- Internal Error 2705. Directory”

The above error message indicates that there is a directory tree definition problem on the machine (a directory references a parent that isn’t defined).  After digging it further, I found why the failure is happening. The root cause is that KB2656353 requires .Net Framework 1.1 SP1 to be registered against the .Net Framework 1.1 product, but it was not.  Even though Microsoft .Net Framework 1.1 SP1 may appear in add/remove programs, it may not be registered.  To determine if SP1 is registered check the install log.

As per the install LOG:
We do not see the 1.1 SP1 patch in the sequence.
MSI (s) (7C:1C) [15:58:37:948]: Final Patch Application Order:
MSI (s) (7C:1C) [15:58:37:948]: {2A3320D6-C805-4280-B423-B665BDE33D8F} -
MSI (s) (7C:1C) [15:58:37:948]: {EFCE7BE0-510E-4932-9475-F44CD90DE16A} –

.Net 1.1  SP1 is {411EDCF7-755D-414E-A74B-3DCD6583F589} and is missing from this list.

Resolution:

Just installing Microsoft .Net Framework 1.1 SP1 patch should resolve this issue. Please install Microsoft .Net Framework 1.1 SP1 http://www.microsoft.com/download/en/details.aspx?id=33 on the system and then install KB2656353.