So we're upgrading to VS 2008 and, according to the configuration screen in STSDEV you can create STSDEV projects in .NET 3.0 for VS 2008. So we installed VS2008, added STSDEV as an external tool and created a test Workflow Project.
The project was created fine but when STSDEV tried to build the project it crashed. We eventually discovered that the error was related to the fact that STSDEV was creating the .csproj file with the following line:
<Import Project="$(MSBuildExtensionsPath)\Microsoft\Windows Workflow Foundation\v3.0\Workflow.Targets" />
<Import Project="$(MSBuildExtensionsPath)\Microsoft\Windows Workflow Foundation\v3.5\Workflow.Targets" />
You can manually go into your .csproj file and change this and your solution should build.
We're looking into modifying the STSDEV code to rebuild the project so that it will do this automatically, but until we figure that out and get it blogged, here's your quick fix.