My suggestion may come too late but anyway...
If you create a project and assign the project location to a network, you will probably get this message:
"The project location is not trusted:
Running the application may result in security exceptions when it attempts to perform actions which require full trust."
Check the project location where you save your project. Copy the project folder to a local c drive and it should work. Tested working using VS.NET 2005.
In short, the File.Exists code does not work if your project is saved to a network.