<p>How do I create a Web Application Project in VS 2008? How is it different from a "WebSite" project?</p>

File--New--Project
instead of File--New--Web Site
It acts as a different container all together and the compile model is different.
ScottGu provided some details when they were first launched:
http://weblogs.asp.net/scottgu/archive/2006/05/08/445742.aspx