The update behavior of VS 2008 setup projects uses file update rules, and this means that files updated by the user won't be replaced. This is normally what people want, so that databases and so on don't get completely replaced.
The only way I know of is to modify your MSI file with Orca. In the InstallExecuteSequence table, delete the InstallExecute row (probably at 6500) and change the sequence of RemoveExistingProducts so that it is immediatly after InstallInitialize. This will result in the uninstall of the old product (the RemoveExistingProducts) being done before your files are installed.