Seems fairly intuitive, but sometimes designers just don't read the messages that Revit displays for them. Do you have a habit of hitting the escape key or the enter key to dismiss dialog boxes without reading them? If you are having difficulty getting Revit 2011 to install, then maybe it is time to read the messages. Revit 2011 will only install the new combined material libraries if DWF Viewer 6.5 is currently installed. It will tell you (see image), but you actually have to read it to know what to do.
The solution is simple, go to your control panel and uninstall DWF Viewer 6.5. (see image)
Now re-boot the machine and re-run your deployment. It should work correctly now as shown below: