Apparently the allignment bug I encountered in vs2005 can be resolved by changing a number of options in the Formating options:

This is by design. The "Indent Case Contents" option under Tools | Options | Text Editor | C# | Formatting | Indentation indents everything from the opening brace to the closing brace. Our preview window is somewhat misleading since it only shows you the effects of the current formatting option.

In order to set your settings to the way you'd like, you'll need to uncheck both
"Indent Open and Close brace" and
"Indent Case Contents."

You'll also need to have "Place open brace on new line for control blocks" checked under Tools | Options | Text Editor | C# | Formatting | New Lines.

Thanks Karen Liu for helping me solve this.