Staying as up-to-date on as many patches as possible is usually a best practice, except when you run into something strange like this. If you have already upgraded your project to Visual Studio 2010 and your SharePoint 2007 environment is at a version beyond 12.0.6421.1000 (SP2), you will not be able to update any new SharePoint 2007 workflows. The existing code will still compile fine, but you won't be able to modify it because some of the key shapes are missing in the toolbox when you open a workflow file; i.e., OnWorkflowActivated. And if you want to create a new MOSS workflow project, you will get this error message:

Exception of type "System.PlatformNotSupportedException" was thrown

This is a known bug to Microsoft, but unfortunately there isn't a hotfix available for the problem. After speaking with Microsoft Support, we did came up with a workaround for people, like me, who are not ready to upgrade to SharePoint 2010, nor able to rollback the VS project to VS2008. 

All you have to do is build a VM that has VS2010 and SharePoint 2007 with patches ONLY up to 12.0.6421.1000. Then download the workflow project from your source code system, open it in VS2010, and you are ready to build some custom MOSS workflows.