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.

ubstitute ..\60\TEMPLATE\1033 with ..\60\TEMPLATE\1033\XML in
all my answers below.

One thing though.. I want my template to be availabel everywhere in my entire farm (not just limited to specific site collections)...

accross all portals (virtual servers) i want the template picker to look consistent..

does this change anything?

Yes, you will want to use the addtemplate operation to push your STP
file into the "Site Template Gallery in the sky" that shows STPs
globally as if they were Site Definitions.

What are the advantages of using STSADM to put STP's in the "Site Template
Gallery in the sky" rather than just putting them in the top-level site
gallery (say, using the Web UI)? Don't both appear the same when users
create sites?

Uploading an STP to the Site Template Gallery in a top-level site makes
that site available in the Template Picker page for any child site of
that site collection.

Putting the STP into the Site Template Gallery in the sky makes that
site available in all site collections in the farm.