Ok thinking it might be VS 2005 SP1 causing the problem, I did a fresh install of VS 2005 and tried again to open the sln project.
This time the project shows as "unavailable"
After installing the "Web Application Addin" or SP1, the project now shows up.
So we are back to square one. When you select "Build Solution", does the DLL files in the BIN directory get updated? Mine doesn't. I am at a lost to why this is happening.