While doing further research, I found an article explaining that upgrading to SP1 caused this issue and there is a hotfix available. My colleague isn't getting the problem and didn't upgrade to VS2010 SP1.
Here's the excerpt that describes my problem and what is occurring in the setup project:
I have just upgraded from VS 2010 to VS 2010 SP1 and I now run into an "infinite loop" of dialog boxes when building a setup (.vdproj) project that is under source control. If the .vdproj is not checked out and I build up the project I get a message when it starts building the setup project saying "The command you are attempting cannot be completed because the file 'XXX.vdproj' is under source control and is not checked out." There are ok and help buttons on the dialog, but if I press the ok button the dialog just closes and reappears. I have to then use task manager to kill devenv.exe.
If I check out the .vdproj before doing the build I can see that the file is changed. It will always change the PackageCode property of the installer, but will sometime also reorder various parts of the file.
My problem is that in all previous versions of VS, simply building up the installer didn't make a change to the file and I don't want to have to have my setup projects checked out all the time to be able to build them up. I also have a scripted build that runs devenv and this fails for the same reason as above.
http://connect.microsoft.com/VisualStudio/feedback/details/650587/vs-2010-sp1-changes-packagecode-in-vdproj-on-each-build-but-fails-as-source-controlled