Hi Craig,
Thanks for your reply. I had looked at the Knowledgebase but must have searched using different criteria and did not find Q157636 which led to the solution to our problems.
A screwed up vss5->vss6 upgrade on one workstation had resulted in that user exclusively checking out the PJM file from VSS. All other workstations had non-exclusive checkouts.
If the PJM file is exclusively checked out to USER1 and USER2 tries to join the project you get the behaviour we were experiencing,

Thanks,

Andy