During further research, I found an article explaining that upgrading to SP1 caused this problem and a fix is available. My colleague is not getting problems and is not upgrading to VS2010 SP1.
Here is an excerpt describing my problem and what is happening in the installation project:
I just upgraded from VS 2010 to VS 2010 SP1, and now I run an “endless loop” of dialog boxes when creating a project (.vdproj) that is under source control. If .vdproj is not verified and I create the project, I get a message when it starts building the installation project, saying: "The command you are trying to execute cannot be completed because the file" XXX.vdproj "is under source control and is not is verified. " There are ok and help buttons in the dialog box, but if I click ok the dialog just closes and reappears. Then I have to use the task manager to destroy the devenv.exe file.
If I check .vdproj before doing the build, I see that the file is modified. It will always change the PackageCode property of the installer, but in some cases will also change the order of the various parts of the file.
My problem is that in all previous versions of VS, just creating the installer did not make changes to the file, and I do not want my configuration projects to be checked all the time to be able to create them. I also have a script build that works devenv, and this does not work 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