Just in case anyone else runs into this problem I was trying to install the source version of Community edition on my Windows 7 / IIS 7.5 set up.  I created a root-level website and granted Full Control to the app pool identity to the Website folder.  However, I kept getting a your site failed permissions check error in the installation wizard.  I solved it by going to the IIS management tool > website > .NET Trust Levels and changing to Trust level = Full.

Hope this helps anyone else in the future...

Thanks Rahul,

That worked for me. It appears that there is a difference between the trust levels in the development config file and the release config.
The development.config contains the line:
<!-- set code access security trust level - this is generally set in the machine.config -->
<trust level="Medium" originUrl=".*" />

This line is commented out in the release config. When you manually change the trust level through inetmngr.exe the web.config file is edited to read:
<!-- set code access security trust level - this is generally set in the machine.config -->
<trust level="Full" originUrl=".*" />

I'm also running Windows 7 and IIS 7.5. Commenting out the trust level line has exactly the same affect as explicitly setting it to Full.

Rob Stacey