I distribute my application using a VS2008 install package, which normally works great. When I create new versions of the app, I go in and increment the Version
Not a direct answer, but the key difference between an upgrade and an uninstall+ a reinstall is that any custom uninstall steps are not called in 2k8 but are in 2k5.
This is referenced in Visual Studio 2005 -> 2008/10 Service Installer Project Upgrade issue
The other difference related to this is that in 2k8, the files get upgraded based on the version info resource - if your modules dont have newer versions, they dont get replaced.
In some cases whether you strong name also has effects, but I'm pretty confident the last paragraph covers the issue you're seeing.