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Found that despite INSTALLDIR pointing elsewhere, OEM MSI will always overwrite older versions if they exist. This may be a problem depending upon your migration strategy. I had to re-setup/capture to get around this. (This is MSI is too smart for its own good).
Here's something crazy but it has worked. Download the Microsoft Office Resource kit for Office XP. Use the ORK to build a new MST (Must be the XP ORK - it doesn't work on tke ORK for Off2K3). All of the install options function properly when UPGRADING systems. Your custom install directories etc, will run and you can embed different scripts or reg-hacks if necessary. All files are carried over for the user. The only difficulty I have is a fresh install on a new box. The damn install path keeps going to C:\Lotus\Notes instead of where I want it!
To change the install location of the program and the data folder, you can modify the properties field within the transform itself. There are two fields, one is "PROGDIR" and the other "DATADIR". The value of these two are what the MSI reads when it installs the files. Change this, and your problem will be resolved.