This is certainly possible.
What it sounds like you're seeing is that you're building an Uncompressed image. I would check out the various options available in the Editor's Release wizard (Installation Designer -> Media -> Releases -> right click on release option -> Release Wizard) to see what other options are available.
Using Windows Installer, it's almost impossible to completely avoid people reverse engineering things like you're concerned about, since Windows Installer is an open format by design.
Best way to handle this would be to create a single compressed Setup.exe for your install--there's a few layers of reverse engineering involved to get at the files in the installation image (getting the MSI from setup.exe, getting the files from the *.msi, etc.).