One difference between 4.01 and 4.3.5 are the modules in the install directory.  4.3.5 has Forums, Blogs, Gallery, Store, and Repository which take a lot longer to install, and the Reports module is also different which creates a folder in the app_code directory.  There is a good chance that these differences are what is causing the app to restart before the install gets finished and causing the indeterminate install problems.  Different people will see different things because the asp.net 2.0 folder watching system is taking many factors into consideration that may be different in each environment.

Try reducing the number of modules in the install folder befor starting the initial install.

If someone can follow the directions here:

http://www.adefwebserver.com/dotNetNukeHELP/DNN4_DevelopmentEnvironment/DNN4DevelopmentEnvironment1.htm

and tell us where they get stuck it would help.

Thanks for confirming this everyone. 
It's already been decided that future installs will not try to install all the modules at once, but this gives us another reason to package them separately.

I'll make sure Shaun knows in our next core team chat.