This error is due to an error in Directory table of the MSI.
Generally occurs while a directory entry that references something non existent as its parent. If you ignore the ICE 03 validation error (Similar to the below mentioned Eg.) while developing the MSI,During the installation you will be getting the “Internal Error 2705. Directory” error.
Eg: of an ICE 03 error :
Orca validation reports an ICE03 error: “Not a valid foreign key; Table:Directory, Column: Directory_Parent, Key ):newfolder1″
This error can be fixed by editing the Directory table.The wrong entries in the ‘Directory table’ will be highlighted in red colour.