I am new to MSI projects so forgive me if I should know th answer to this question, but how does COM extraction work? Does it actually register the file on your dev machine, making changes to your registry, and monitor the activity? If so, how does it work if the file is already registered since no registry changes will actually be made?
Also, which is better to use, Extract at Build, or manually extracting in the IDE?
The COM extraction does register whichever file is set for extraction. However, the registry is remapped with the RegOverridePredefKey API (http://msdn2.microsoft.com/en-us/library/ms724901.aspx) to a private key prior to performing the registration. Since the registry is remapped, the file being registered on the machine beforehand shouldn't have any effect (also note that this can cause registration to fail if the file performs conditional registration based on registry data, since it is unavailable).
Extracting at build is helpful if your COM data changes frequently. Otherwise, the IDE extraction should be sufficient.
