I've never seen this one before. This certainly sounds like a bug in the Visual Studio .NET. What you'll need to do is get Visual Studio .NET completely removed from your system. The Knowledge Base article at http://support.microsoft.com/?id=824642 shows you exactly how to remove all traces of Visual Studio .NET so you can try the installation again.
Dig deeper on Visual Studio 2008 and Language Integrated Query (LINQ)
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