Visual Studio 2008 extensions for Windows SharePoint Services 3.0 - Problem

When you try to install Visual Studio Extensions for Windows SharePoint services or SharePoint 2007 on your Windows XP workstation, it fails after displaying the following or similar message:
"This product can only be installed if Windows SharePoint Services 3.0 has been installed"

You don't have to install WSS on your workstation. Even if you try, it fails after showing a message similar to the following:
"This product requirs Windows Server 2003 SP1. Install this service pack and re-run setup"

I attempted a few workaround and then came across Umakanth's blog post  that fixes this problem in one simple registry edit to make the setup program believe that SharePoint is installed on your workstation.

1.Run regedt32 and navigate to
[HKEY_LOCAL_MACHINE\SOFTWARE\Microsoft\Shared Tools]

2. If there is a key "Web Server Extensions" get into it else create one

3. If there is a key "12.0" get into it else create one

4. Create the following string value
Name = Sharepoint
Value = ”Installed”

5. Re-run the setup and see it work.
Wait! Though the extensions are installed, your project may still show errors like "Could not load file or assembly" when you reference "Microsoft.Sharepoint" and other assemblies.

All you need is to drag the SharePoint assemblies from folder: C:\Program Files\Common Files\Microsoft Shared\web server extensions\12\ISAPI on your ShaerPoint server and drop to c:\windows\assembly folder of your workstation. Make sure that the files are from a 32-bit server.