The folder is probably called $SYSTEM$ or $WINDOWS$\system32, where
$SYSTEM$ is the system folder (usually c:\windows\system32 or
c:\winnt\system32) and $WINDOWS$ is the windows installation folder.
So the install program should be able to locate the file, regardless
of the folder's name (by default it was c:\windows up to win98 and
c:\winnt starting with win2k).
That's probably a problem with Windows Installer itself; I'd
reccommend you check your registry and windows installation for
corrupt files or registry entries, as you might run into the same
problem again with other applications.
Nelson