When you receive a message from Windows Live OneCare that an infection or threat has been found and the results of the efforts to remove the threat indicate: "Quarantine Failed" it means that OneCare has found an infection in a location that it cannot quarantine or remove the infection from, so the infection is blocked. Typical locations are files in use, temporary internet files, system restore points, and email stores.
The most likely location of the infection is within the attachment to an email. Unfortunately, OneCare does not make it easy at this time to determine what message the attachment is with. You can open the last scan report from the OneCare main interface or you can create a support log (open One Care, click Change OneCare Setting, click the Logging tab, click "create support log") to find the details of the infection, but neither will tell you the actual location. Assuming that it is within an email attachment, empty any junk mail folders for your email program and clear out your Deleted Items folder of any messages with attachments. That may take care of it.
A future update to OneCare will improve reporting to tell you exactly which message has the infected attachment
UPDATE 7/18/07 - I have been advised that the supportlog.html file that you can create using the instructions above will now show you the subject and date and time of the message when an infection is found within the Outlook .pst mail store. In a future program release, the same data will be displayed when the infection is found so you are not faced with the rather useless "quarantine failed" message only.