By default MSIInstaller is run under the system account unless it's been changed but I wouldn't expect to see a 1603 error, I'd expect to see errors relating to permissions if that were the problem.
It seems likely that there's something screwy in the windows installer config.
Will it install after you run the windows installer cleanup utility?
http://support.microsoft.com/default.aspx?scid=kb;en-us;290301