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Resharper can do the same: http://www.jetbrains.com/resharper/

ReSharper can download source code over the internet or do I have to setup things manually? put them in the right place, etc?

You don't need ReSharper, you can step into the core .Net libs from Visual Studio and it will download what's required.

If you want to step into the source code of other projects however, I don't think that scenario is handled yet. Perhaps a feature to be added to NuGet.

Its automatic. If it can't get the source, it will use its built in decompiler, and produce surprisingly readable source anyway (I force it to this mode by default, due to a flaky internet connection).

How does ReSharper managed to locate the 3rd-party source code?

Does ReSharper have their own source repository or some sort?

As the parent listed, Resharper by default will download MS sources for BCL. For a third party, it will show the decompiled source.

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