If you receive the following error while trying to build your web setup project:

• Unable to build project output group 'Content Files from [MyWebSetupProject] (Active)'

It means that there is some piece of content (codefile, image, etc) that is still included in the project but no longer exists on disk.  The only way I've found to find the culprit is to manually browse through my Solution Explorer tree and look for files with the little yellow warning triangle on them.  In all my cases, these were files I really did mean to delete but forgot to remove from the project.  The error was horribly vague, but correct.

Link to where I found this solution and more information on the problem:

http://www.hanselman.com/blog/VisualStudioMSIProblemsUnableToBuildProjectOutputGroupContentFilesFromSOMEWEBActive.aspx

*UPDATE*   -- 12/21/2009

I just had an "episode" where I was getting this error but there were no missing files to be found anywhere in the solution.  

Here are the steps I took to fix the problem:

1.  A did a "rebuild all" and everything built with no errors.  

2.  I built the setup project and got the "Unable to build project output group" error.

3.  I did a "clean solution" and then "rebuild all" which succeeded but then gave me the same "Unable to build... " error when I built the setup project.

4.  I deleted every "obj" and "bin" folder in every project and then did a "rebuild all"

5.  This gave me several missing references (which I have no explanation for seeing as I did not adjust or toy with any references before starting this process.)

6.  I fixed the references, and did another "rebuild all"

7.  aaaaaaaand.... fail with the same "unable ... " error.  <sigh>

8.  I checked file permissions on the entirety of the code folders.  No issues.  Same error.

9.  I set build output to "diagnostic" and leafed through the 200 pages of text looking for errors.  None found.

10.  I checked to make sure the build settings were all the same on each project (All set to "release") no issues found.  Same build error.

11.  I wrote a quick application that parses the xml in the .vbproj files and validated the existance (on disk) of every file in its correct location.  I did this for all "content", "compile" and "embeddedresource" files.  No missing files found.

12.  I restarted VS several times making sure I "run as administrator".  No change.

13.  I googled the error during this whole process ad nausium. I truly felt like I was trapped in a googlplex.

14.  I blew away my setup project and added and built each project individually in the setup project with NO ERRORS.  <ARGH!>

15.  I then reconstructed my entire setup project again and it failed again with the same error.

16.  I cursed Microsoft with fists raised toward the heavens.

17.  For reasons of insanity and total desperation I rebooted the build machine.

18.  Web Setup project = "Build Successful."  <CRY>

I deployed a working WCF service to IIS7 on Server2008 and got a 404 File not Found error.  

Turned out I had to re-register the WCF components and suddenly it all started working.

Oddness.

Here's the command:

C:\Windows\Microsoft.Net\Framework\v3.0\Windows Communication Foundation\ServiceModelReg.exe -r

If you ever see this error trying to build your web setup project:

• Error 1 Build failed due to validation errors in C:\…\DB.dbml. Open the file and resolve the issues in the Error List, then try rebuilding the project. C:\…\DB.dbml

Do the following to fix visual studio.

1. Close the Visual Studio project.
2. Open a new command prompt
3. Navigate to C:\Program Files\Microsoft Visual Studio 9.0\Common7\IDE
4. Run Visual Sudio with the /resetskippkgs argument: devenv /resetskippkgs
5. Open your solutions
6. Build your web Setup project.

Where I found this solution:

http://blog.mjjames.co.uk/2008/07/build-failed-due-to-validation-errors.html