Prior to installation, open the CD's directory and make sure SETUP.exe and INSTALL.exe are set to Windows XP (Service Pack 2) or earlier (as early as Windows 95) compatibility mode by going into properties and clicking on the compatibility tab for both files. If you are having any trouble getting Lego Island to work on Windows Vista and Windows 7, just follow this step by step until it works.
Bits and pieces were scattered all about both on this forum and elsewhere so I figured I'd just post it all together here.