Comparing your logs to mine, I can see a difference that would explain the problem, but I'm not sure why Windows/.NET is behaving differently on your system. One thing that might be a factor: It appears that there is (at least vestiges of) a pre-release version of the 2.0 .NET Framework on your system (build 50215) in addition to the RTM 50727 build. Can that version be uninstalled or can you try this on a machine that never had any pre-release versions of .NET installed?
I doubt it will make a difference, but you might try uninstalling v1.0 of the .NET Framework (I tested on a machine w/ 1.0, 1.1, and 2.0 RTM installed and it worked ok). You might also make sure you have the latest SP of all the installed .NET Framework versions.
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