Creating setup of application

How to create a Setup package

1. Start a new project by doing one of the following:
   • On the File menu, point to New, and then click Project.
     
     -or-
   • If you have an project open that you would like to create a setup package for, right-click Solution MyProject(where the name of your project is MyProject) in the Solution Explorer, point to Add, and then click New Project.
2. In the New Project dialog box, select Setup and Deployment Projects in the Project Type pane, and then select the type of setup that you want in the Templates pane.
   
   The project is added to the Solution Explorer, and then the File System Editor opens.
3. In the Properties dialog box, select the ProductName property, and then type the name of your product.

How to add files to the Setup package

1. In the File System Editor, select the Application Folder node.
2. Right-click the Application folder, and then on the Action menu, click Add, File. In the Add Files dialog box, browse to select any files that you need to add to your application.
   
   NOTE: If you already have an application project in your solution, you can add the project outputs by selecting Project Outputs instead of File.
3. To add an existing merge module to your setup package (this is not possible for a Cab project), right-click the name of your setup package in the Solution Explorer. Click Add, and then click Merge Module. In the Add Modules dialog box, browse to select any merge modules that you need to add to your application.
4. 
   
5. original link:  http://support.microsoft.com/kb/307353