I found the answer, but it was obscure. The way that installshield lets you specify an application's folder hierarchy is screwy. Let's assume you want the app's install folder to be C:\MYAPP. First of all, you cannot explicitly use C:\ as the so-called [installdir]. You have to use [windowsvolume], which provides the same functionality, so I learned. However, this makes it look at install time like the app is being installed in C:\ when in fact it's not, because the entire app hierarchy is encapsulated in it's own folder \MYAPP. However, what I wanted it to work like was this:
1: Install will be into C:\MYAPP (that's what user is told will happen).
2: Install then results in several files and also some subfolders being placed into C:\MYAPP

The bizzare thing is that when you are picking your files for inclusion with installshield, the right-hand pane only shows files within a folder, and not subfolders, so I can't make it work as described above. That is, I cannot make it dump both files and subfolders into a specific [installdir] destination.

I don't know if this makes sense. You have to try it to see what I mean.

>Maybe this will help you http://support.installshield.com/kb/view.asp?pcode=CLASS350XEE&articleid=Q105680
>
>>Thanks. I've solved the C++ MSM error... it was actually unrelated to that module.
>>
>>Now with I try to run the Setup.exe on a WinXP system, I get an Error 1322, something about a path name exceeding the system's maximum allowable length (but it doesn't tell me the actual path name, so I have NO idea where the problem is).
>>
>>???
>>
>>
>>>>Sergey, Wait! Now that I'm digging in, I have two more questions about installshield:
>>>>1. Why am I getting an installshield build error regarding the inclusion of MSVCR70.msm:
>>>>
>>>>Merging Microsoft Visual C++ 7 Runtime Library: C:\Program Files\Common Files\Microsoft Shared\Merge Modules\MSVCR70.msm
>>>> ** Error -3018: Error determining target for shortcut [ProgramMenuFolder]\##NEW_STRING6## in feature Always Install
>>>> ** Error -3018: Error building Shortcut table in feature Always Install
>>>>
>>>
>>>It's weird. There's no need to create shortcut for VC++ runtime.
>>>
>>>>2. How can I get installshield to NOT include the MTDLL support file? This is not needed and adds megs to the setup image size. Don't they have an "exe-support-only" version of the VFP7 run-time library?
>>>
>>>AFAIK, there's only one version of merge module(MM) for VFP runtimes. You can eaither include runtimes directly w/o MM or use Orca to create new MM w/o vfp7t.dll.