I've created .net 2.0 assemblies using vs2008, and linked with sharepoint 2007 libraries and then deployed on sharepoint servers. You won't be able to create .net 1.1 assemblies with vs2008 out of the box - so if you need to target .net 1.1 your best bet is to stick with a virtual server setup.
Developing for sharepoint on vista (or xp for that matter) is challenging because you can't debug line by line unless you attach remotely to server2k3. My recommendation for sharepoint developers is to install virtual server on vista, and then install vstudio on the virtual server with sharepoint. If you are going to do this, you can stick with your current version of visual studio, and then debugging is much easier than from vista.
Depending on whether your company has an msdn subscription, this can be more costly if you have to buy a virtual server license, etc... but it is well worth it to make development easier, in my opinion.