I too have been a victim of this dreaded problem, likely caused by installing and uninstalling various beta versions of .NET 2.0 frameworks and tools. A great post by Gregg Miskelly (a dev on the VS debugger team) offered tons of promising looking tips, none of which worked. (note: Does anyone know how to interpret the output of DebuggerDiagnostics.exe?).
Of course, Setup - removing, repairing, or reinstalling - all failed. Finally, I just deleted all the files in C:\Program Files\Common Files\Microsoft Shared\VS7Debug (stop the Machine Debug Service first), copied fresh ones from my MSDN DVD, and restarted the service. Bingo.
I mentioned Alan Cooper's keynote at the patterns & practices Summit a couple of weeks back. Alan's talk about "Ending the Death March" was - as expected - outstanding. Here's a picture from the kickback room after his talk with some of our speakers - including Ward Cunningham, Gregor Hohpe, and Rocky Lhotka (headless, on the left) - sitting with Alan and some of attendees: