Sql server 2008 R2 installation fails with Error: 17204

Sql server 2008 R2 installation fails with the below error message in the log message,

This is a part of the sql server log

Starting up database ‘msdb’. Error: 17204, Severity: 16, State: 1.
FCB::Open failed: Could not open file
e:sql10_main_t.obj.x86fresqlmkmastrdatabasesobjfrei386model.mdf
for file number 1. OS error: 21(failed to retrieve text for this
error. Reason: 1815).

Has anyone come across such an issue. Please help on how to resolve this issue.

EDIT: the sql server error log can be found at http://pastebin.com/TED7vJWX

EDIT:
This is the latest log,
2012-09-20 14:34:29.74 spid6s Starting up database ‘mssqlsystemresource’.

2012-09-20 14:34:29.78 spid6s The resource database build version is 10.50.1600. This is an informational message only. No user action is required.

2012-09-20 14:34:30.51 spid6s Error: 15209, Severity: 16, State: 1.

2012-09-20 14:34:30.51 spid6s An error occurred during encryption.

Same as before.

This is a known issue which has several causes:

1. The first thing to check is your permissions on local machine:
2. Are You a local Administrator?
3. Is there a group policy that might prevent you from installing debugging?

If these do not resolve the problem in your case, and you have verified the required permissions, please provide more info:

1. What parameters do you use during installation (beside the default ones)?
2. Which Edition of SQL Server are You installing?
3. Do You use Default instance name?
4. On which O/S are You installing?

EDIT:
Next steps:
1. open the folder “:Program FilesMicrosoft SQL Server100Setup BootstrapLog
2. Find a file named Detail.txt
3. This file has a complete log, You need to find the FIRST error that occured during installation.
4. Paste it here, only the part with the error.

EDIT:
Added Solution to comments, waiting to hear if the problem is solved