When running the install for VSeWSSv11.exe, do you get:

Seriously? So this means I can use Windows XP or Vista to develop WSS stuff? Boo. The download page does say it requires Windows Server 2003 or 2008. Boo, I say.

Merge this .reg

Windows Registry Editor Version 5.00

[HKEY_LOCAL_MACHINE\SOFTWARE\Microsoft\Shared Tools\Web Server Extensions\12.0]
"SharePoint"="Installed"

and try again. Yay! Of course to really work on SharePoint stuff you'll also need various dlls like Microsoft.SharePoint.dll.

gacutil -i Microsoft.SharePoint.dll
gacutil -i Microsoft.SharePoint.Security.dll

Ah... much better. But it is still pretty weak. I prefer to use plain projects and use a custom build action to cab it up.