If you create a VS2005 solution which contains an exe project and any other project type which has a project reference to the exe project, chaos will ensue.
You may see errors like the following:
Could not find file 'someResource.ico' referenced by assembly 'C:\path\to\your\assembly.exe.manifest'.
You might even see the error:
Could not find file 'Microsoft.Windows.CommonLanguageRuntime"
It turns out this is a bug in Visual Studio 2005:
msdn forum thread
other msdn forum thread
We ran into this problem when creating a project to contain Unit Tests that references the actual application project. The work around we're using is to turn off the "Enable ClickOnce Security Settings" check box in the Project -> Properties -> Security menu. Unfortunately, when you publish an application through ClickOnce this option is automatically checked. That means you'll have to turn it back off after you finish your publish so your Unit Test solution doesn't fail to build.
The other work around is to replace the project references with references to compiled dlls. However, that clearly isn't very helpful if you're trying to do TDD.
From what I can learn, it seems that this bug is fixed in VS2008 but I haven't had an opportunity to test that for myself yet.