Comment #47 on issue 13044 by TJHart85cell: Extensions fail to install if  
the temp directory is under an NTFS junction
http://code.google.com/p/chromium/issues/detail?id=13044

Wow!  This was a massive PITA to find!

Had the C:\Users & C:\'Documents and Settings' directories junctioned (with  
mklink I
think) to D:\Users on my girlfriends laptop & we ran into this issue as  
well.

Changed both %TMP% and %TEMP% to %systemroot%\temp and now all is good, but  
it was a
lot of searching to find this solution!

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