Thanks Albert that worked, here's what I did.
From Add/Remove programs I selected InfoPath, clicked change and from the popup dialog 'Add or Remove features'>Continue. Microsoft Office InfoPath>.NET Programmability Support (enabled)>.NET Programmabiltiy Support for .NET Framework version 2.0 (disabled - huh?). I enabled this and Visual Studio Tools for Applications underneath it, after installing it finally worked. The installed products list now reads:
Microsoft Visual Studio 2005
Version 8.0.50727.42 (RTM.050727-4200)
Microsoft .NET Framework
Version 2.0.50727
Installed Edition: Professional
Microsoft Visual Basic 2005 xxxxx-xxx-xxxxxxx-xxxxx
Microsoft Visual Basic 2005
Microsoft Visual C# 2005 xxxxx-xxx-xxxxxxx-xxxxx
Microsoft Visual C# 2005
Microsoft Visual Studio 2005 Tools for Applications xxxxx-xxx-xxxxxxx-xxxxx
Microsoft Visual Studio 2005 Tools for Applications
Microsoft Visual Studio Tools for Office xxxxx-xxx-xxxxxxx-xxxxx
Microsoft Visual Studio Tools for the Microsoft Office System
Visual Studio 2005 Tools for Office Second Edition xxxxx-xxx-xxxxxxx-xxxxx
Microsoft Visual Studio 2005 Tools for the 2007 Microsoft Office System
A lot of fuss for what should be a simple hello world.