Having trawled around for a few hours trying to install since 10:00pm (Now being 6:40am >.<) I thought I'd chip in saying I've got the problem too. Here's a list of things I've done thus far:
I originally had the Beta installed which I removed all traces of before starting the retail installer.
All the Agents, Setups and Launchers are set to run as admin.
The Secondary Login service is set to Automatic.
I've deleted the Battle.net folder more times than I can count.
I've started up in Safe Mode with Networking to find that the Secondary Login service won't enable in that mode.
I am running it using the patcher that we had emailed to us on the 12th May.
I've uninstalled AVG and allowed the Setup, Launcher and Agent files access through the Windows Firewall.
I've checked "Never Dial a Connection" in Internet Properties.
I've tried 3 fresh downloads onto different machines, along with all the above fixes, still with no joy.
I've tried Compatibility Mode to Windows XP SP3 (I know that there's a sticky recommending we don't, but if I turn that off, I get stuck in an Updating Setup File loop)
I've tried running all the variants of Agent.exe that are found in the Battle.net folder.
I've also occasionally done a full computer sweep/registry sweep for all mentions of "Diablo" and tried doing a fresh installation from there.
A few times, I've had the Updating Setup Files finish, and been able to reach the installer, but then it will freeze at 1% for up to an hour. Deleting the Battle.net folder to fix this, 9 times out of 10, resulted in the Updating Setup Files freezing at around 60%
All of which, unfortunately, still leave me hanging at 1%, and after deleting the Battle.net folder, stuck on Updating Setup Files