I'm posting this because I've run across it recently and figured it out
this morning. Perhaps other users will benefit.

Symptom: Trying to install an application to XPSP2 with installation
files located on a server, a dialog with this message appears: "Windows
cannot access the specified device, path or file."

Solution: In the IE7 Security settings, Miscellaneous section, inspect
"Launching applications and unsafe files." On the test station, this was
set to Disable. After I changed it to Prompt, the application installer
would run after you click through a warning dialog.

In one case, the installation would run if the install directory were
copied to the local drive, but wouldn't run over the network. Readers
may savor the irony of files considered "safe" when they reside on a
malware-hobbled Windows desktop as opposed to a NetWare server.