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Problem is that Visual Studio 2008 does not have Windows Service project and you can not add it and create a setup for this project.

To override this use manual approach:

1. Create your service class manually:

using System;
using System.Diagnostics;
using System.ServiceProcess;

namespace WindowsService
{
    class WindowsService : ServiceBase
    {
        ///
        /// Public Constructor for WindowsService.
        /// - Put all of your Initialization code here.
        ///
        public WindowsService()
        {
            this.ServiceName = "My Windows Service";
            this.EventLog.Log = "Application";

            // These Flags set whether or not to handle that specific

            //  type of event. Set to true if you need it, false otherwise.

            this.CanHandlePowerEvent = true;
            this.CanHandleSessionChangeEvent = true;
            this.CanPauseAndContinue = true;
            this.CanShutdown = true;
            this.CanStop = true;
        }

        ///
        /// The Main Thread: This is where your Service is Run.
        ///
        static void Main()
        {
            ServiceBase.Run(new WindowsService());
        }

        ///
        /// Dispose of objects that need it here.
        ///
        ///
Whether
        ///    or not disposing is going on.
        protected override void Dispose(bool disposing)
        {
            base.Dispose(disposing);
        }

        ///
        /// OnStart(): Put startup code here
        ///  - Start threads, get inital data, etc.
        ///
        ///

        protected override void OnStart(string[] args)
        {
            base.OnStart(args);
        }

        ///
        /// OnStop(): Put your stop code here
        /// - Stop threads, set final data, etc.
        ///
        protected override void OnStop()
        {
            base.OnStop();
        }

        ///
        /// OnPause: Put your pause code here
        /// - Pause working threads, etc.
        ///
        protected override void OnPause()
        {
            base.OnPause();
        }

        ///
        /// OnContinue(): Put your continue code here
        /// - Un-pause working threads, etc.
        ///
        protected override void OnContinue()
        {
            base.OnContinue();
        }

        ///
        /// OnShutdown(): Called when the System is shutting down
        /// - Put code here when you need special handling
        ///   of code that deals with a system shutdown, such
        ///   as saving special data before shutdown.
        ///
        protected override void OnShutdown()
        {
            base.OnShutdown();
        }

        ///
        /// OnCustomCommand(): If you need to send a command to your
        ///   service without the need for Remoting or Sockets, use
        ///   this method to do custom methods.
        ///
        ///
Arbitrary Integer between 128 & 256
        protected override void OnCustomCommand(int command)
        {
            //  A custom command can be sent to a service by using this method:
            //#  int command = 128; //Some Arbitrary number between 128 & 256
            //#  ServiceController sc = new ServiceController("NameOfService");
            //#  sc.ExecuteCommand(command);

            base.OnCustomCommand(command);
        }

        ///
        /// OnPowerEvent(): Useful for detecting power status changes,
        ///   such as going into Suspend mode or Low Battery for laptops.
        ///
        ///
The Power Broadcast Status
        /// (BatteryLow, Suspend, etc.)
        protected override bool OnPowerEvent(PowerBroadcastStatus powerStatus)
        {
            return base.OnPowerEvent(powerStatus);
        }

        ///
        /// OnSessionChange(): To handle a change event
        ///   from a Terminal Server session.
        ///   Useful if you need to determine
        ///   when a user logs in remotely or logs off,
        ///   or when someone logs into the console.
        ///
        ///
The Session Change
        /// Event that occured.
        protected override void OnSessionChange(
                  SessionChangeDescription changeDescription)
        {
            base.OnSessionChange(changeDescription);
        }
    }
}

2. Add installer class:

using System;
using System.ComponentModel;
using System.Configuration.Install;
using System.ServiceProcess;

namespace WindowsService
{
    [RunInstaller(true)]
    public class WindowsServiceInstaller : Installer
    {
        ///
        /// Public Constructor for WindowsServiceInstaller.
        /// - Put all of your Initialization code here.
        ///
        public WindowsServiceInstaller()
        {
            ServiceProcessInstaller serviceProcessInstaller =
                               new ServiceProcessInstaller();
            ServiceInstaller serviceInstaller = new ServiceInstaller();

            //# Service Account Information
            serviceProcessInstaller.Account = ServiceAccount.LocalSystem;
            serviceProcessInstaller.Username = null;
            serviceProcessInstaller.Password = null;

            //# Service Information
            serviceInstaller.DisplayName = "My New C# Windows Service";
            serviceInstaller.StartType = ServiceStartMode.Automatic;

            //# This must be identical to the WindowsService.ServiceBase name
            //# set in the constructor of WindowsService.cs
            serviceInstaller.ServiceName = "My Windows Service";

            this.Installers.Add(serviceProcessInstaller);
            this.Installers.Add(serviceInstaller);
        }
    }
}

3. Use Framework 2.0 instalutil.exe to create Installation:

Install.bat

@ECHO OFF

REM The following directory is for .NET 2.0
set DOTNETFX2=%SystemRoot%\Microsoft.NET\Framework\v2.0.50727
set PATH=%PATH%;%DOTNETFX2%

echo Installing WindowsService...
echo ---------------------------------------------------
InstallUtil /i WindowsService.exe
echo ---------------------------------------------------
echo Done.

Uninstall.bat

@ECHO OFF

REM The following directory is for .NET 2.0
set DOTNETFX2=%SystemRoot%\Microsoft.NET\Framework\v2.0.50727
set PATH=%PATH%;%DOTNETFX2%

echo Installing WindowsService...
echo ---------------------------------------------------
InstallUtil /u WindowsService.exe
echo ---------------------------------------------------
echo Done.