tested with VSS2005
on server add some new file/folder with file
modify some existing files
locally checkout and modify some file
make writeable and modify another file etc
invoke UpdateProject (with any option - ask/skip/replace - really 'skip' is done always):
it reports that all files are up-to-date; the new files are got silently; the writeable files are skipped silently

the information about skipped files at least should appear in Update view

Issue was resolved