There is a decent article on the Web Development Tools Team site about creating web-based subprojects on IIS. Sub-projects work well for isolating subprojects under one main hat. I’ve used this before in long-term migration from ASP->ASP.NET.
A few years ago (VS2003), we ran into a problem where Windows XPE clients were causing an obscure runtime error on login. There was simply no way to log into our application from these boxes. It turned out that XPE’s IE crammed some unexpected information in the HTML header that .Net was choking on. The problem was verified with MS support and our only solution was to break out the subprojects into top-level projects.
I did some searches to see if this has been fixed, but I cannot find a reference to it. I hope VS2005 has fixed it, because from what I’ve seen, pushing a fix to XPE boxes is more difficult due to the fact that these are often used as terminal-style boxes on LANs. (At least as I’ve seen them).