I couldn't find a way to add an external project reference to my Whidbey web project, so I googled for answers. Instead, I found that Matt Hawley, among others was having the same problem. Well, Matt hasn't looked hard enough! :-)
The answer is right there in the Readme:
13.19. The Add Reference button in property pages dialog boxes does not work
Steps to reproduce:
Start Visual Studio 2005.
Create a new Web site.
Right-click the Web project in Solution Explorer and click Property Pages on the shortcut menu.
Click Add Reference.
Nothing happens.
To resolve this issue
To add a reference to a managed assembly: Create a /Bin folder and add the assembly to /Bin by using the Add existing item shortcut menu To add a reference to an unmanaged COM component: Use TlbImp.exe to create an interop assembly and add that assembly to /Bin by using the steps above There currently is no workaround for adding a project reference.
Enjoy!