In the first release of Microsoft Visual Studio 2005, Microsoft introduced a new web application model called the Web Site Project for C#, which had many differences with the old model. Riots ensued, and in VS 2005 SP1 they were forced to introduce the Web Application Project for C# that worked much the way the old ones did. Go here for more details.
Web Application Projects provide a companion web project model that can be used as an alternative to the built-in Web Site Project in Visual Studio 2005. This new model is ideal for web site developers who are converting a Visual Studio .Net 2003 web project to Visual Studio 2005.
So just an FYI to .NET developers: In any future C# Web Services you build (in VS 2005), you should be using the new Web Application Projects model. (Thanks to Anton Sipos for reminding me.)
Cheers!