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From WiX Wiki at MindCapers

I found the problem:

       <Package
          ...
           Compressed="no"
       />

Setting this to "yes" fixed it. Suddenly my MSI was 4meg and it worked.

I did read that _Streams was a temporary table in MSDN, but the instructions for embedding a CAB (http://msdn2.microsoft.com/en-us/library/aa369279.aspx) tell you to add it to the _Streams table in step 8.