There is an ongoing thread on the XNA Creators Club forums about how to create an installer using Inno Setup, a free and very capable installer program.
The script described by Pelle in the first posts of this thread works great for XNA GSE 1.0 and Refresh, but is problematic for XNA GS 2.0 games because of the dependency on .NET 2.0 Service Pack 1. I won’t bring much new information in this post, but will try to summarize everything I read and tried it into a tested & true solution that I’m currently using for the Fez installer.
Please note that this solution does not work if your game requires use of the GamerServicesComponent of live networking using XNA, since you need the whole Game Studio for it to work. (see this post)
Also, it wasn’t made with 64-bit operating systems in mind, so if you’re going to support them you’ll have to modify it. It has been known to work on Vista though.