Thanks Jon (for your work and your reply). In the future I will post there. I did create a discussion on the page in codeplex for the extensions.
I have fixed the problem. I will post the problem/solution here, and in the discussions page on codeplex in case anyone ever runs up against this! (I hate searching for the solution to a problem only to find the exact question I'm looking for with a reply by the poster saying "Never mind, I fixed it.") I am using XP, VS2008 SP1.
After reading your reply, and looking back at the path where VS was looking for the \lib folder, I realized it WAS creating that folder - in a temporary folder. The DNNSkin.targets file was created based on those paths, and when I saved the project, it did not of course bring the \lib folder with it. The fix for this is simple, there is an option -- Options -> Projects and Solutions - "Save new projects when created" that needed checked.
Then I got a different error: "A project with that name is already opened in the solution"
Google led me to this blog post: http://irwinj.blogspot.com/2009/02/project-conversion-woes-project-with.html
I checked in the .vbproj file, and sure enough the ProjectTypeGuids were:
<ProjectTypeGuids>{349c5851-65df-11da-9384-00065b846f21};{FAE04EC0-301F-11D3-BF4B-00C04F79EFBC}</ProjectTypeGuids>
The first guid is for a web app, the second was for a c# app. I had created the project based from the template under the VB Project Type, but the file had the wrong guid. I just had to change that to the one for VB.NET {F184B08F-C81C-45F6-A57F-5ABD9991F28F}
Everything is great now! Again, thank you very much for your work. You have simplified the lives of many!