I found the following fix from Peter van der Goes for someone else's problem.
I have to say that this problem/fix should probably be in a FAQ. I thank my
lucky stars for this forum!

Thanks a Million Peter!!!!!!! You saved one machine the fate of being tossed
out of my second story window. ;)

-------------------------------
Try this as a possibility.
This fix was posted for a similar problem and may well work for you.
<quote>
Seems that Windows is running what is defined in App Paths for "setup.exe"
Judging by the error that you are getting, Windows is running
<system32>\setup.exe instead of the setup.exe from the CD.

Open regedit and navigate to
HKEY_LOCAL_MACHINE\Software\Microsoft\Windows\CurrentVersion\App
Paths\Setup.exe

Double click on the default value and clear the value data.  It should now
be blank.  This should clear up your problem and allow you to install VS.

</quote>

Hope this helps.