Can't tell if this is WSS v2 or WSS v3. I've assumed WSS v2 but most of
the comments apply regardless. Please see my inline comments...

Question #1: Why is 'Project Team Site' present in the UI list, but not
in the WEBTEMP.XML file?
[Todd] You told us that the Project Team site  is a SharePoint Template
Package (STP) file. That binary file  is stored in the database in the
Site template  Gallery for the site collection where it was captured. If
it was subsequently saved  to a filesystem and then uploaded in other
site collection Site Template Galleries, they will have an additional
copy.


Also, I noticed that there is another XML file in the same folder
called: "WEBTEMPPROJECT.XML". When I open  up this file, I do see the
Project Team site listed.
[Reply] However, this would lead us to think that someone actually
created a Site Definition called  Project Team Site not just an STP file.
If there is indeed a Project Team Site Site Definition, you will have to
set Hidden to TRUE for the Configuration in this XML file so that it
will no longer globally show in this list.


Question #2: Shouldnt all of the templates  all be referenced in a single
WEBTEMP.XML file rather than be spread among different files?
[Reply] No, all files  that begin with the letters "WEBTEMP" in the
..60\TEMPLATE\1033\ directory including your "WEBTEMPPROJECT.XML" file
will be parsed when the WSS v3 Application Pool spins up. So, the
PROJECT (assumed name) Site Definition's Project Team Site Configuration
will show on the Template Picker Page of every Site Collection.


Question #3: What is the best (easiest & safest) way to remedy all of
this? I want to get everything back  to default  and add  my new templates
as recommended.
[Reply] Set the Project Team Site Configuration's Hidden property to TRUE
in the ..60\TEMPLATE\1033\WEBTEMPPROJECT.XML file and upload your STP
file to the Site Template Gallery of each site collection where you want
to see that Site Template on the Template Picker Page.