Jim,

I had a problem similar to this and got this reply on the support forums:

JW,

The most likely reason that the Encapsulate Field refactoring is failing is
that it is unable to find the Code Snippet that it needs to use in order to
generate the actual property.  This wouldn't effect the preview
functionality, as you've noticed, because the preview only shows the
references that would be updated and not the actual property insertion.
There are 3 .snippet files that the feature relies on,
EncapsulateField.snippet, EncapsulateFieldGet.snippet, and
EncapsulateFieldSet.snippet.  These are located in the %program
files%\Microsoft Visual Studio 8\VC#\Snippets\1033\Refactoring directory.
If those files exist then it's possible that the registration of that
directory is incorrect.  If you go to Tools menu there is an option for Code
Snippets Manager.  Check to see if that directory is listed in the left hand
pane.  If it's not, add it via the add... button at the bottom of that
dialog, and then try the feature again.

Hope that helps!
Anson Horton
C# IDE PM

Maybe you have a similar problem - the full thread can be found here:
http://forums.microsoft.com/msdn/ShowPost.aspx?PostID=10003

Regards,

Jason.