The new version of visual studio does not content the web application project template, which was available in visual studio 2003. The way you can create web project is to create a new web site. I have no idea why its like that but the web application project was cooler than web site template.
Anyway may be Microsoft wanted to try new things. But there is always a work around for the problems, you can download the web application project template from here. Installing this project template would give you web application project template for both c# and vb.net.
We found a very cool web site about Visual studio web application project template and lots of help with it. Thanks to Scott Gu. He have provided a awesome site with lots of tutorials.
Please visit Visual Studio 2005 Web Application Project for more information.
Never mind the old stuff web project is now available with the latest service pack. Life would be lot easier if they had provided it earlier.