When you want to deploy WSE project through Setup Project there are two ways to do it:
1. Run the Web Services Enhancements (WSE) 2.0 SP1 for Microsoft .NET Redistributable Runtime MSI using msiexec through the Setup Project Installer
2. The WSE assembly contains an installer class that handles registration so you can put the Microsoft.Web.Services.dll in the gac and run InstallUtil /i Microsoft.Web.Services.dll to register it.