Another way to ask this question is - "How to get the setup application to build the dotnetfx folder and the WindowsINstaller3_1".
So that when you run the build of the setup application it creates a folder called dotnetfx and another folder called WindowsInstaller3_1
Well to do this, right click on your Setup project (from within the IDE), and then select Properties. Then click on the "Prerequisites" button. In the window that pops up make sure "Create setup program to install...." is checked. In the next area, select ".NET Framework 2.0" and "Windows Installer 3.1" and in the radio buttons towards the bottom, select "Download prerequisites from the same location as my application" Then click 'OK'.
Now when you build your application it will create thos folders for you.