Hi Jason
A few things...
1. Does the Account have permission to run as a service? if you should run something like this
<MSBuild.ExtensionPack.Computer.ActiveDirectory TaskAction="GrantPrivilege" User="$(UserName)" Privilege="SeServiceLogonRight"/>
2. A difference between this way of installing the service and using installutil is that installer code is not run in the service so you will not get the default eventlog source created. I suspect your users is not an admin and what's happening is it wants to write an event to the event log using its name as a source, but the source does not exist and it cant create the source because it's not an admin. To get around this you could change where you service logs to or create the event source using the registry task.
I'll see if I can make this process a little less complex in the next release.
Hope that helps
Mike