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Short Description:  Visual Studio supports two modes of ASP.NET project management (with subtle differences):

1. Web Site Projects 
2. Web Application Projects.

Web Application Projects vs Web Site Projects - Subtle differences (Part 1) quote:

Visual Studio 2005 shipped with the Web Site Project to do ASP.NET development. Later, Microsoft realized that the previous mode used in Visual Studio 2003 was also useful, so they added the Web Application Projects later as a download and now it is included in SP1.
The main differences between both approaches are that for Web Application Projects, all code-behind class files and all the stand alone classes for the project are compiled into a single assembly placed in the bin folder; for Web Site Projects, the source code is deployed and when a page is requested dynamic compilation takes place, generating an assembly for each page (this is not 100% true as there are some options to change the default behavior, precompilation, etc, but is enough for the following discussion).

A more in depth comparison is avaiable in this MS paper table, quote:

The Future of Web Application Projects

Web application projects provide a compilation and build model very similar to the one used in Visual Studio .NET 2003. Depending on their requirements, some users will find the new Web site project option in Visual Studio 2005 more appropriate for their applications, while other users will prefer the Web application project option. Web application projects provide the best path for upgrading existing Visual Studio .NET 2003 applications to Visual Studio 2005, and are highly recommended for that scenario.
We want to emphasize these important points about the future of Visual Studio 2005 Web application projects:

• Going forward, we will fully support both the Visual Studio 2005 Web site project model and Visual Studio 2005 Web application project model. You can choose whichever model works best for you.
• In future versions of Visual Studio, the Web application project model will be built in, and both the Web application project model and Web site project model will be supported.

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A detailed tutorial on Upgrading VS 2005 Web Site Projects to be VS 2005 Web Application Projects
Web Application Projects versus Web Site Projects (MSDN)