The 'ever popular' 1324 error

I've been reading a lot of archived posts with problems like this, but
none quite match our situation:

We run office locally on XP workstations - with the install launched
with group policies on our 2003 server. If we just do a default all
seems well, but if we use and mst file, which we want to do as we do not
want Office Assistant (the students do nothing other than customize and
animate it :-(), we have 1324 errors.

The process we are going through is as follows.
Wipe the hard drive of a station and remove it from AD
Rebuild the station as 'build' and ensure the gpo is not adding software
packages.
Move it to a new OU in AD and tell it to run the data1.msi file in our
shared software area with the x.mst file as a modification. Office
installs just how we want it with no Office Assistant.

Log in as a domain admin and everything is fine.

Log on as a 'normal' user and when you click on help SR1 configuration
starts and then "Error 1324 The Folder path 'Application Data' contains
and invalid character". If we keep clicking ok eventually help will
open. We are re-directing application data to their roaming profile, so
it may be connected with that - but we re-direct for domain admins too.

Making domain users administrators on the local machine does not resolve
the problem.

We would be very grateful for any advice or guidence on this as we're
stumped.
thanks
andy