That one's consistent with disk/file damage. The first thing I'd try with that is running a disk check (chkdsk) over your C drive.
XP instructions in the following document: How to perform disk error checking in Windows XP
Select both Automatically fix file system errors and Scan for and attempt recovery of bad sectors, or use chkdsk /r (depending on which way you decide to go about doing this). You'll almost certainly have to schedule the chkdsk to run on startup. The scan should take quite a while ... if it quits after a few minutes or seconds, something's interfering with the scan.
Does the chkdsk find/repair any damage? If so, can you get an install to go through properly afterwards?
I'm seeing this problem as well though its on Windows 7 on a new Notebook and its complaining about the same file in a different location, on a Network drive. I don't have write access to that network drive nor do I understand why I would need to write to that file while installing iTunes 10.3. The file its attempting to write to was actually created by an Oracle install of JRE to that network location that's referenced by my NoteBook via my path environment variable.
Anyone know 1) why it needs to write to the dns_sd.jar file and 2) how to avoid this problem during installation of iTunes 10.3?