Yes, I believe this is an MS bug rather than a VBP bug. First, the Make VS.NET action uses MSBuild by default for building VS 2005 projects. However, MSBuild doesn't support building of VS Setup projects. This is remedied by entering 'devenv' (without quotes) in the 'Override default location...' field on the Options tab, so that the action will use the devenv command-line compiler instead.
Using VS 2005 Beta 2, after creating a new Setup Project and building the .sln file in VBP with the change noted above (or via devenv directly, which VBP uses for the build part) produces output like this:
Microsoft (R) Visual Studio Version 8.0.50215.44.
Copyright (C) Microsoft Corp 1984-2005. All rights reserved.
Package 'Visual Studio Source Control Integration Package' failed to load.
<at this point a messagebox is displayed by devenv>
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Error
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Unable to open project 'C:\Documents and Settings\user\My Documents\Visual Studio\Projects\Setup1\Setup1\Setup1.vdproj'.
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OK
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