Thanks Jon. With your help, I was able to get things working.
Here are the caveats that I found.
1) The references are injected into the system when the precompiled header is compiled.
Since I was "Compile"ing a file and not "Build"ing the project, the precompiled header was not being compiled. Hence the references
were not being injected for me.
2) The DLLs for project references are copied to the proper directory only if "Using managed code" was set for the project. Since
I had a 1000 files "Not Using managed code" and only 1 file "Using managed code", I set that property only on that 1 file. Hence the
DLL's were not being copied for me.
You can see why I thought the reference folder was totally useless.