When trying to install a VB.NET application that includes a NI merge module, I get Error 2705. To troubleshoot this problem, I created a simple installation project from a Microsoft Walkthrough (My Notepad.) I checked that the installation worked on my target machine. Then I added a Microsoft merge module and rechecked. Everything was okay. Then I added a NI merge module. On my first try, I added MStudioNet.msm and got the error. Then I tried ni_utility.msm and it failed also. After reviewing your posted messages I also added the "Program Files Folder" to the file system target. This did not fix the problem.
I have had this identical behavior on two test machines. Please advise if there are any
solutions. I am attaching my test project.