This has been known forever, from Vista through to Windows 7.

The solution to it is simple, and was posted on mydigitallife website ages ago (do a search for "mydigitallife net 1.1").

Otherwise here is a a copy/paste to install .Net 1.1 and SP1 into Vista or Win7 (32 or 64 bit).

1. Create a new folder named DotNetin C:\ drive (C:\DotNet is used in this guide, you can change to any folder you prefer, but ensure that you use correct path in the following steps).
2. Download Microsoft .NET Framework 1.1 Redistributable Package (dotnetfx.exe ). Make sure the setup file is saved asdotnetfx.exe .
3. Download Microsoft .NET Framework 1.1 Service Pack 1 (NDP1.1sp1-KB867460-X86.exe ). Make sure that the file is renamed and saved asdotnetfxsp1.exe , so that the rest of the steps can be followed easily.
4. Move both installation files into the same directory (i.e. C:\DotNet), if you’re not saving them together.
5. Open command prompt as Administrator .
6. Change to the directory where the two installation setup files for .NET 1.1 are saved (i.e. C:\DotNet).
7. Run the following commands one by one, press Enter after each one.
   • dotnetfx.exe /c:"msiexec.exe /a netfx.msi TARGETDIR=C:\DotNet"
   • Then click on “Yes” when prompted to answer “would you like to install Microsoft .NET Framework 1.1. Package?”
   • dotnetfxsp1.exe /Xp:C:\DotNet\netfxsp.msp
   • msiexec.exe /a c:\DotNet\netfx.msi /p c:\DotNet\netfxsp.msp

Install Microsoft .Net Framework 1.1 with slipstreamed/integrated Service Pack 1 by running netfx.msi created in the working folder.

To Stop the Dot  Net  installation Errors Pl follow the following Instructions. It Will b helpful 4 u.

1. Go to Command Prompt by running CMD as Administrator then do the following

a.  Type  Net stop wuauserv

b. Goto Windows Directory Rename  the software Distribution folder into software DistributionOLD

c. Restart the PC

d.  Now Install  dot net

After the successful Installation Run the Following 

e. Net start wuauserv

                                           Good Luck ...!