1. Scripting in MSI is deemed harmful. If you did scripting, you should've picked JScript since it sucks less, but ultimately the Windows Installer team discourages you from scripting.
2. Have you looked into WiX? After using all kinds of setup-creating software, I'm definite that on the Windows platform I'll be using Windows Installer, created using WiX. I've used:
- Nullsoft Installer
Pros: free software
Cons: self-extracting Zip on steroids -- a *weird* scripting language creating procedural installers
- InstallShield
Pros: easy to use, hack up stuff fast
Cons: stores your project in a proprietary format; it crashes and you cannot figure out heads and tails, it encourages procedural installers with a proprietary InstallScript language; it encourages non-standard MSIs

WiX is free software (pretty much all C# -- though Windows Installer is still not free software so you might have some cans of worms there), represents the Windows Installer concepts pretty faithfully in its XML schema, has human-readable and editable projects (XML files)... does very little non-straightforward things.
It doesn't sport any GUI (like you come to expect from InstallShield and likes) but if you install its' XSD schema into VS2003's schemas directory, you can pretty comfortably edit it (Intellisense and all...).

I suggest you check within WiX' help files whether there's such an action already -- perhaps there's a simple FileRemove component, or a FileRemove Custom Action.

Actually, the scripts in CustomActions are run with the privileges of whoever is set to execute the msiexec service. But that's not the point. That's the point:
http://blogs.msdn.com/robmen/archive/2004/05/20/136530.aspx

Of course, scripts make your installer procedural whereas the rest of Windows Installer is declarative tables, so that's another reason to avoid them wherever possible.

Then again, sometimes there's no better way. Just like they discourage nested installations while sometimes there's simply no better way.

Another thing for WiX: While it's free software, it's Microsoft-subsidized and written by Microsoft employees who have close access to the Windows Installer team (or are *in* the team? Not sure). It's used across Microsoft, for Office, SQL Server, MSN Desktop Search -- see http://msdn.microsoft.com/chats/transcripts/windows/windows_110904a.aspx .

Here are a few random attempts at answers

1. Ilya, thank you for such positive comments on the WiX toolset (http://wix.sourceforge.net). We have worked hard to have a very clean interface on top of the Windows Installer (which can sometimes be a beast).

2. Tomer, as Ilya notes, scripts make an installation procedural. The problem with procedural is that you (without a lot of work) lose the compensating transaction the Windows Installer engine provides. Thus, if your user hits cancel or something goes wrong during the install the machine could end up in a dirty/bad state.

3. Ilya, CustomActions (a batch file script in this case) can execute in either system or user context. The CustomAction/@Impersonate attribute controls this in WiX.

4. Ilya, Only Robert Flaming (http://blogs.msdn.com/rflaming) who works on the WiX decompiler actually works on the Windows Installer team (as a PM). The rest of the people all have worked on actual setup teams for groups like Office and Windows.

5. Finally, "subsidized* is an interesting word. The WiX toolset is a community project. The code is available under Open Source and there are many people on the mailling lists to answer questions and help out.

We have fun with it. Hopefully, it is useful for you too.

Hey Rob, thanks for the thorough response (out of curiousity, how'd you come by this post in the first place?)

I like the concept of declerative programming in general as it can save a lot of time and effort, particularly for an installer. I do not have much experience coding installers of any sort really, so I can't say how powerful Windows Installer (regardless of front-end) is; I have found VS2003's built-in setup projects to be horribly limiting to the point where you can't do squat without external scripts. I'm definitely giving WiX a try for my future projects (possibly even for phase II of this particular project, but that remains to be seen), so you'll probably be hearing my feedback one way or another :-)