.NET 2 Windows Service Setup Project (MSI) Issues

Question

I've written a .NET 2 windows service on a Windows 7 64 machine in C# using Visual Studio 2010. Installing on a .NET 4 machine works famously, but installing on a .NET 2 (Windows Server 2000 in this case) results in "The installer was interrupted before YourApplication could be installed...". See below that my verbose install logs indicate an issue with DIRCA_CheckFX; I've set the framework for this msi to .NET 2 and have no prerequisites.

Additionally, I've tried to use ORCA to remove custom actions "DIRCA_CheckFX" and "VSDCA_VsdLaunchConditions", this allows the msi to run initially but eventually blows up with "error 1001 installutillib.dll unknown error". I've had no luck finding a solution, can someone please provide some advice?

Note: I replaced all instances of my company name with "Company" and all instances of the application name with "YourApplication".

UPDATE: Traditional Install.bat and Uninstall.bat work like a charm. However, I'd still like to handle installation with an MSI.

Thanks!

=== Verbose logging started: 11/8/2011  19:18:13  Build type: SHIP UNICODE 3.01.4000.4033  Calling process: C:\WINNT\system32\msiexec.exe ===
MSI (c) (40:30) [19:18:13:968]: Resetting cached policy values
MSI (c) (40:30) [19:18:13:968]: Machine policy value 'Debug' is 0
MSI (c) (40:30) [19:18:13:968]: ******* RunEngine:
           ******* Product: YourApplication.WindowsService.Setup.msi
           ******* Action: 
           ******* CommandLine: **********
MSI (c) (40:30) [19:18:13:983]: Machine policy value 'DisableUserInstalls' is 0
MSI (c) (40:30) [19:18:13:999]: Cloaking enabled.
MSI (c) (40:30) [19:18:13:999]: Attempting to enable all disabled priveleges before calling Install on Server
MSI (c) (40:30) [19:18:14:030]: End dialog not enabled
MSI (c) (40:30) [19:18:14:030]: Original package ==> C:\Documents and Settings\Company\Desktop\YourApplication.WindowsService.Setup.msi
MSI (c) (40:30) [19:18:14:030]: Package we're running from ==> C:\DOCUME~1\Company\LOCALS~1\Temp\2\dc09783d.msi
MSI (c) (40:30) [19:18:14:030]: APPCOMPAT: looking for appcompat database entry with ProductCode '{119C89D2-0CF8-49F7-BC80-166272B839A2}'.
MSI (c) (40:30) [19:18:14:030]: APPCOMPAT: no matching ProductCode found in database.
MSI (c) (40:30) [19:18:14:030]: MSCOREE not loaded loading copy from system32
MSI (c) (40:30) [19:18:14:030]: Machine policy value 'TransformsSecure' is 0
MSI (c) (40:30) [19:18:14:030]: User policy value 'TransformsAtSource' is 0
MSI (c) (40:30) [19:18:14:030]: Note: 1: 2262 2: MsiFileHash 3: -2147287038 
MSI (c) (40:30) [19:18:14:030]: Machine policy value 'DisablePatch' is 0
MSI (c) (40:30) [19:18:14:030]: Machine policy value 'AllowLockdownPatch' is 0
MSI (c) (40:30) [19:18:14:030]: Machine policy value 'DisableLUAPatching' is 0
MSI (c) (40:30) [19:18:14:030]: Machine policy value 'DisableFlyWeightPatching' is 0
MSI (c) (40:30) [19:18:14:030]: APPCOMPAT: looking for appcompat database entry with ProductCode '{119C89D2-0CF8-49F7-BC80-166272B839A2}'.
MSI (c) (40:30) [19:18:14:030]: APPCOMPAT: no matching ProductCode found in database.
MSI (c) (40:30) [19:18:14:030]: Transforms are not secure.
MSI (c) (40:30) [19:18:14:030]: Command Line: CURRENTDIRECTORY=C:\Documents and Settings\Company\Desktop CLIENTUILEVEL=0 CLIENTPROCESSID=2624 %HOMEPATH=\Documents and Settings\Company %HOMEDRIVE=C: %HOMESHARE= 
MSI (c) (40:30) [19:18:14:030]: PROPERTY CHANGE: Adding PackageCode property. Its value is '{8D6518BE-F4E6-468F-B5AC-9FD3FE45A97E}'.
MSI (c) (40:30) [19:18:14:030]: Product Code passed to Engine.Initialize:           ''
MSI (c) (40:30) [19:18:14:030]: Product Code from property table before transforms: '{119C89D2-0CF8-49F7-BC80-166272B839A2}'
MSI (c) (40:30) [19:18:14:030]: Product Code from property table after transforms:  '{119C89D2-0CF8-49F7-BC80-166272B839A2}'
MSI (c) (40:30) [19:18:14:030]: Product not registered: beginning first-time install
MSI (c) (40:30) [19:18:14:030]: PROPERTY CHANGE: Adding ProductState property. Its value is '-1'.
MSI (c) (40:30) [19:18:14:030]: Entering CMsiConfigurationManager::SetLastUsedSource.
MSI (c) (40:30) [19:18:14:046]: User policy value 'SearchOrder' is 'nmu'
MSI (c) (40:30) [19:18:14:046]: Adding new sources is allowed.
MSI (c) (40:30) [19:18:14:046]: PROPERTY CHANGE: Adding PackagecodeChanging property. Its value is '1'.
MSI (c) (40:30) [19:18:14:046]: Package name extracted from package path: 'YourApplication.WindowsService.Setup.msi'
MSI (c) (40:30) [19:18:14:046]: Package to be registered: 'YourApplication.WindowsService.Setup.msi'
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2729 
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2729 
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2729 
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2729 
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2729 
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2729 
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2729 
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2729 
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2729 
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2729 
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2729 
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2729 
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2729 
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2729 
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2729 
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2729 
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2262 2: AdminProperties 3: -2147287038 
MSI (c) (40:30) [19:18:14:046]: PROPERTY CHANGE: Modifying ALLUSERS property. Its current value is '2'. Its new value: '1'.
MSI (c) (40:30) [19:18:14:046]: Machine policy value 'DisableMsi' is 0
MSI (c) (40:30) [19:18:14:046]: Machine policy value 'AlwaysInstallElevated' is 0
MSI (c) (40:30) [19:18:14:046]: User policy value 'AlwaysInstallElevated' is 0
MSI (c) (40:30) [19:18:14:046]: Product installation will be elevated because user is admin and product is being installed per-machine.
MSI (c) (40:30) [19:18:14:046]: Running product '{119C89D2-0CF8-49F7-BC80-166272B839A2}' with elevated privileges: Product is assigned.
MSI (c) (40:30) [19:18:14:046]: PROPERTY CHANGE: Adding CURRENTDIRECTORY property. Its value is 'C:\Documents and Settings\Company\Desktop'.
MSI (c) (40:30) [19:18:14:046]: PROPERTY CHANGE: Adding CLIENTUILEVEL property. Its value is '0'.
MSI (c) (40:30) [19:18:14:046]: PROPERTY CHANGE: Adding CLIENTPROCESSID property. Its value is '2624'.
MSI (c) (40:30) [19:18:14:046]: TRANSFORMS property is now: 
MSI (c) (40:30) [19:18:14:046]: PROPERTY CHANGE: Adding VersionDatabase property. Its value is '200'.
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\Company\Application Data
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\Company\Favorites
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\Company\NetHood
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\Company\My Documents
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\Company\PrintHood
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\Company\Recent
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\Company\SendTo
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\Company\Templates
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\All Users\Application Data
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\Company\Local Settings\Application Data
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\Company\My Documents\My Pictures
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\All Users\Start Menu\Programs\Administrative Tools
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\All Users\Start Menu\Programs\Startup
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\All Users\Start Menu\Programs
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\All Users\Start Menu
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\All Users\Desktop
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\Company\Start Menu\Programs\Administrative Tools
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\Company\Start Menu\Programs\Startup
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\Company\Start Menu\Programs
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\Company\Start Menu
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\Company\Desktop
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\Documents and Settings\All Users\Templates
MSI (c) (40:30) [19:18:14:046]: SHELL32::SHGetFolderPath returned: C:\WINNT\Fonts
MSI (c) (40:30) [19:18:14:046]: Note: 1: 2898 2: MS Sans Serif 3: MS Sans Serif 4: 0 5: 16 
MSI (c) (40:30) [19:18:14:046]: PROPERTY CHANGE: Adding Privileged property. Its value is '1'.
MSI (c) (40:30) [19:18:14:046]: Note: 1: 1402 2: HKEY_CURRENT_USER\Software\Microsoft\MS Setup (ACME)\User Info 3: 2 
MSI (c) (40:30) [19:18:14:046]: PROPERTY CHANGE: Adding USERNAME property. Its value is 'Authorized User'.
MSI (c) (40:30) [19:18:14:046]: Note: 1: 1402 2: HKEY_CURRENT_USER\Software\Microsoft\MS Setup (ACME)\User Info 3: 2 
MSI (c) (40:30) [19:18:14:046]: PROPERTY CHANGE: Adding COMPANYNAME property. Its value is 'Company Technologies'.
MSI (c) (40:30) [19:18:14:046]: PROPERTY CHANGE: Adding DATABASE property. Its value is 'C:\DOCUME~1\Company\LOCALS~1\Temp\2\dc09783d.msi'.
MSI (c) (40:30) [19:18:14:046]: PROPERTY CHANGE: Adding OriginalDatabase property. Its value is 'C:\Documents and Settings\Company\Desktop\YourApplication.WindowsService.Setup.msi'.
MSI (c) (40:30) [19:18:14:046]: PROPERTY CHANGE: Adding SourceDir property. Its value is 'C:\Documents and Settings\Company\Desktop\'.
MSI (c) (40:30) [19:18:14:046]: PROPERTY CHANGE: Adding SOURCEDIR property. Its value is 'C:\Documents and Settings\Company\Desktop\'.
MSI (c) (40:E8) [19:18:14:061]: PROPERTY CHANGE: Adding VersionHandler property. Its value is '3.01'.
=== Logging started: 11/8/2011  19:18:14 ===
MSI (c) (40:30) [19:18:14:061]: Note: 1: 2262 2: PatchPackage 3: -2147287038 
MSI (c) (40:30) [19:18:14:061]: Machine policy value 'DisableRollback' is 0
MSI (c) (40:30) [19:18:14:061]: User policy value 'DisableRollback' is 0
MSI (c) (40:30) [19:18:14:061]: PROPERTY CHANGE: Adding UILevel property. Its value is '5'.
MSI (c) (40:30) [19:18:14:061]: PROPERTY CHANGE: Adding ACTION property. Its value is 'INSTALL'.
MSI (c) (40:30) [19:18:14:061]: Doing action: INSTALL
MSI (c) (40:30) [19:18:14:061]: Note: 1: 2262 2: ActionText 3: -2147287038 
Action 19:18:14: INSTALL. 
Action start 19:18:14: INSTALL.
MSI (c) (40:30) [19:18:14:061]: UI Sequence table 'InstallUISequence' is present and populated.
MSI (c) (40:30) [19:18:14:061]: Running UISequence
MSI (c) (40:30) [19:18:14:061]: PROPERTY CHANGE: Adding EXECUTEACTION property. Its value is 'INSTALL'.
MSI (c) (40:30) [19:18:14:061]: Doing action: DIRCA_CheckFX
Action 19:18:14: DIRCA_CheckFX. 
Action start 19:18:14: DIRCA_CheckFX.
MSI (c) (40:F0) [19:18:14:077]: Invoking remote custom action. DLL: C:\DOCUME~1\Company\LOCALS~1\Temp\2\MSI16.tmp, Entrypoint: CheckFX
MSI (c) (40:F4) [19:18:14:077]: Cloaking enabled.
MSI (c) (40:F4) [19:18:14:077]: Attempting to enable all disabled priveleges before calling Install on Server
MSI (c) (40:F4) [19:18:14:077]: Connected to service for CA interface.
Action ended 19:18:14: DIRCA_CheckFX. Return value 3.
MSI (c) (40:30) [19:18:14:140]: Doing action: FatalErrorForm
Action 19:18:14: FatalErrorForm. 
Action start 19:18:14: FatalErrorForm.
Info 2898. VSI_MS_Sans_Serif13.0_0_0, MS Sans Serif, 0
DEBUG: Error 2826:  Control Line1 on dialog FatalErrorForm extends beyond the boundaries of the dialog to the right by 3 pixels
The installer has encountered an unexpected error installing this package. This may indicate a problem with this package. The error code is 2826. The arguments are: FatalErrorForm, Line1, to the right
DEBUG: Error 2826:  Control Line2 on dialog FatalErrorForm extends beyond the boundaries of the dialog to the right by 3 pixels
The installer has encountered an unexpected error installing this package. This may indicate a problem with this package. The error code is 2826. The arguments are: FatalErrorForm, Line2, to the right
DEBUG: Error 2826:  Control BannerBmp on dialog FatalErrorForm extends beyond the boundaries of the dialog to the right by 3 pixels
The installer has encountered an unexpected error installing this package. This may indicate a problem with this package. The error code is 2826. The arguments are: FatalErrorForm, BannerBmp, to the right
Info 2898. VsdDefaultUIFont.524F4245_5254_5341_4C45_534153783400, MS Sans Serif, 0
Info 2898. VSI_MS_Sans_Serif16.0_1_0, MS Sans Serif, 0
Action 19:18:14: FatalErrorForm. Dialog created
MSI (c) (40:E8) [19:18:14:218]: Note: 1: 2731 2: 0 
Action ended 19:18:15: FatalErrorForm. Return value 1.
Action ended 19:18:15: INSTALL. Return value 3.
MSI (c) (40:30) [19:18:15:843]: Destroying RemoteAPI object.
MSI (c) (40:F4) [19:18:15:843]: Custom Action Manager thread ending.
Property(C): UpgradeCode = {0237101A-070C-496D-AA2E-8861E91E96B0}
Property(C): SourceDir = C:\Documents and Settings\Company\Desktop\
Property(C): ProgramMenuFolder = C:\Documents and Settings\All Users\Start Menu\Programs\
Property(C): DesktopFolder = C:\Documents and Settings\All Users\Desktop\
Property(C): VSDFrameworkVersion = v2.0
Property(C): VSDAllowLaterFrameworkVersions = False
Property(C): ProductName = YourApplication
Property(C): ProductCode = {119C89D2-0CF8-49F7-BC80-166272B839A2}
Property(C): ProductVersion = 1.0.0
Property(C): Manufacturer = Company Technologies
Property(C): ARPCONTACT = Company Technologies
Property(C): ARPCOMMENTS = YourApplication Data Collection Service
Property(C): ARPURLINFOABOUT = www.Company.com
Property(C): ProductLanguage = 1033
Property(C): ALLUSERS = 1
Property(C): SecureCustomProperties = PREVIOUSVERSIONSINSTALLED;NEWERPRODUCTFOUND
Property(C): RedirectedDllSupport = 1
Property(C): VersionNT = 500
Property(C): VSDNETURLMSG = This setup requires the .NET Framework version [1].  Please install the .NET Framework and run this setup again.  The .NET Framework can be obtained from the web.  Would you like to do this now?
Property(C): VSDIISMSG = This setup requires Internet Information Server 5.1 or higher and Windows XP or higher.  This setup cannot be installed on Windows 2000.  Please install Internet Information Server or a newer operating system and run this setup again.
Property(C): VSDUIANDADVERTISED = This advertised application will not be installed because it might be unsafe. Contact your administrator to change the installation user interface option of the package to basic.
Property(C): VSDNETMSG = This setup requires the .NET Framework version [1].  Please install the .NET Framework and run this setup again.
Property(C): VSDINVALIDURLMSG = The specified path '[2]' is unavailable. The Internet Information Server might not be running or the path exists and is redirected to another machine. Please check the status of this virtual directory in the Internet Services Manager.
Property(C): VSDVERSIONMSG = Unable to install because a newer version of this product is already installed.
Property(C): AdminMaintenanceForm_Action = Repair
Property(C): ErrorDialog = ErrorDialog
Property(C): SFF_UpFldrBtn = UpFldrBtn
Property(C): SFF_NewFldrBtn = NewFldrBtn
Property(C): DefaultUIFont = VsdDefaultUIFont.524F4245_5254_5341_4C45_534153783400
Property(C): FolderForm_AllUsers = ME
Property(C): FolderForm_AllUsersVisible = 1
Property(C): MaintenanceForm_Action = Repair
Property(C): AdminWelcomeForm_NextArgs = AdminFolderForm
Property(C): AdminFolderForm_PrevArgs = AdminWelcomeForm
Property(C): AdminFolderForm_NextArgs = AdminConfirmInstallForm
Property(C): AdminConfirmInstallForm_PrevArgs = AdminFolderForm
Property(C): WelcomeForm_NextArgs = FolderForm
Property(C): FolderForm_PrevArgs = WelcomeForm
Property(C): FolderForm_NextArgs = ConfirmInstallForm
Property(C): ConfirmInstallForm_PrevArgs = FolderForm
Property(C): PackageCode = {8D6518BE-F4E6-468F-B5AC-9FD3FE45A97E}
Property(C): ProductState = -1
Property(C): PackagecodeChanging = 1
Property(C): CURRENTDIRECTORY = C:\Documents and Settings\Company\Desktop
Property(C): CLIENTUILEVEL = 0
Property(C): CLIENTPROCESSID = 2624
Property(C): VersionDatabase = 200
Property(C): VersionMsi = 3.01
Property(C): WindowsBuild = 2195
Property(C): ServicePackLevel = 4
Property(C): ServicePackLevelMinor = 0
Property(C): MsiNTProductType = 3
Property(C): WindowsFolder = C:\WINNT\
Property(C): WindowsVolume = C:\
Property(C): SystemFolder = C:\WINNT\system32\
Property(C): System16Folder = C:\WINNT\system\
Property(C): RemoteAdminTS = 1
Property(C): TempFolder = C:\DOCUME~1\Company\LOCALS~1\Temp\2\
Property(C): ProgramFilesFolder = C:\Program Files\
Property(C): CommonFilesFolder = C:\Program Files\Common Files\
Property(C): AppDataFolder = C:\Documents and Settings\Company\Application Data\
Property(C): FavoritesFolder = C:\Documents and Settings\Company\Favorites\
Property(C): NetHoodFolder = C:\Documents and Settings\Company\NetHood\
Property(C): PersonalFolder = C:\Documents and Settings\Company\My Documents\
Property(C): PrintHoodFolder = C:\Documents and Settings\Company\PrintHood\
Property(C): RecentFolder = C:\Documents and Settings\Company\Recent\
Property(C): SendToFolder = C:\Documents and Settings\Company\SendTo\
Property(C): TemplateFolder = C:\Documents and Settings\All Users\Templates\
Property(C): CommonAppDataFolder = C:\Documents and Settings\All Users\Application Data\
Property(C): LocalAppDataFolder = C:\Documents and Settings\Company\Local Settings\Application Data\
Property(C): MyPicturesFolder = C:\Documents and Settings\Company\My Documents\My Pictures\
Property(C): AdminToolsFolder = C:\Documents and Settings\All Users\Start Menu\Programs\Administrative Tools\
Property(C): StartupFolder = C:\Documents and Settings\All Users\Start Menu\Programs\Startup\
Property(C): StartMenuFolder = C:\Documents and Settings\All Users\Start Menu\
Property(C): FontsFolder = C:\WINNT\Fonts\
Property(C): GPTSupport = 1
Property(C): OLEAdvtSupport = 1
Property(C): ShellAdvtSupport = 1
Property(C): Intel = 6
Property(C): PhysicalMemory = 976
Property(C): VirtualMemory = 1689
Property(C): AdminUser = 1
Property(C): LogonUser = Company
Property(C): UserSID = S-1-5-21-1214440339-2025429265-1417001333-1171
Property(C): UserLanguageID = 1033
Property(C): ComputerName = FTS-2KVM
Property(C): SystemLanguageID = 1033
Property(C): ScreenX = 1920
Property(C): ScreenY = 1200
Property(C): CaptionHeight = 19
Property(C): BorderTop = 1
Property(C): BorderSide = 1
Property(C): TextHeight = 16
Property(C): ColorBits = 8
Property(C): TTCSupport = 1
Property(C): Time = 19:18:15
Property(C): Date = 11/8/2011
Property(C): MsiNetAssemblySupport = 2.0.50727.1433
Property(C): Privileged = 1
Property(C): USERNAME = Authorized User
Property(C): COMPANYNAME = Company Technologies
Property(C): DATABASE = C:\DOCUME~1\Company\LOCALS~1\Temp\2\dc09783d.msi
Property(C): OriginalDatabase = C:\Documents and Settings\Company\Desktop\YourApplication.WindowsService.Setup.msi
Property(C): SOURCEDIR = C:\Documents and Settings\Company\Desktop\
Property(C): VersionHandler = 3.01
Property(C): UILevel = 5
Property(C): ACTION = INSTALL
Property(C): EXECUTEACTION = INSTALL
=== Logging stopped: 11/8/2011  19:18:15 ===
MSI (c) (40:30) [19:18:15:905]: Note: 1: 1708 
MSI (c) (40:30) [19:18:15:905]: Product: YourApplication -- Installation failed.

MSI (c) (40:30) [19:18:15:905]: Grabbed execution mutex.
MSI (c) (40:30) [19:18:15:905]: Cleaning up uninstalled install packages, if any exist
MSI (c) (40:30) [19:18:15:905]: MainEngineThread is returning 1603
=== Verbose logging stopped: 11/8/2011  19:18:15 ===

Answer 1

There is a problem with Visual Studio 2010, its included "bootstrapper" for .NET custom actions cannot detect .NET framework 2.

Microsoft will not fix this, see http://connect.microsoft.com/VisualStudio/feedback/details/588640/vs-2010-setup-project