MacBook will not display on external monitor in clamshell mode

System information:

13 in. MacBook (2.4Ghz Intel 2-Core)

10.6.7

External Display connected with Apple DisplayPort VGA adapter

Apple Wireless Keyboard

Generic wireless mouse that connects to a USB stick plugged into the MacBook

This is dirving me nuts because it was working perfectly until about 2 weeks ago. I was following the pocess outlined here. http://support.apple.com/kb/HT3131

Here is what happens now:

1. MacBook display and external monitor are in mirroring mode. All devices are powered on and plugged in.
2. Close MacBook lid. MacBook goes to sleep. Blinking LED.
3. Hit spacebar on the Apple Bluetooth keyboard. The LED changes to steady on. However, the external display never shows the desktop. I've tried Command-F1... nothing.
4. If I open the lid again... the MacBook goes back to sleep.
5. I then have to pull out the DisplayPort VGA adapter to wake the MacBook up again.