Ok,

I've fixed it. For those of you who don't care how I figured it out here's
the solution:

- Open VS2005, go to Tools->Options
- Select "Projects and Solutions"
- Note the directories for "Visual Studio user project templates" and
"Visual Studio user item templates".
- Make sure they point to a location that exists and doesn't have
non-template .zip files underneath them.

In my case, they pointed to the same location as my Visual Studio project
files. I ended up making a new directory called Templates and setting both
locations to it. And viola, I now can create projects and add new items
again.

For those of you who like to know the process. I googled: "visual studio
2005" create hangs
And found this article:

http://forums.microsoft.com/MSDN/ShowPost.aspx?PostID=733239&SiteID=1

I then checked the Event Viewer and noticed lots of "Visual Studio -
VsTemplate" errors. Another google and I found this article:

http://weblogs.asp.net/rajbk/archive/2005/11/14/VS.net-2005-RTM-_2D00_-Lost-abil
ity-to-create-new-websites.aspx

Which led me to change the template settings in the options window.

Best of luck to all of you,
John