One of our partners was installing SQL 2005 64 bit cluster and while he was in the components selection page he faced this error "The drive specified cannot be used for program location. Program files must be installed on a valid local disk available on all cluster nodes". One of my colleagues was onsite and they gave me a call to help, looking to the KB articles we found that we must use an account with Administrative privilege on the nodes, another article highlighted that the installation shouldn't be on the root of the drive. Looking to the situation we are in we found that we are using the Administrator account and that we are not installing to the root of the drive!!!

After further investigations I found that the Administrative shares "C$, D$, etc..." are disabled using registry that is applied by domain security policies using group policy, since SQL installation will require connectivity to the administrative shares we deleted the key, excluded the servers from the policy, restarted both nodes and restarted the installation and it works smoothly with no problems.

Summary is if you faced this error in SQL cluster installation, make sure that you can access the Administrative hidden shares on both nodes...