Although this has nothing to do with virtualization, it has everything to do with great tools. I have always used WiX for my Installer (Setup) projects starting with Visual Studio 2005 and higher. Now, version 3.5 has been released for Visual Studio 2010.
Windows Installer XML Toolset enables you to define all components of your product through XML. It is very easy to use and creates small and fast Installer Packages.
You can read more about WiX here where you can also download the release.