Not sure why this is occuring:

I downloaded the "web application add-in". Dont want to use the defualt web-site that comes with 2.0.

I went to "file, New project" and it opened a project. Added a webform. Saved. When saving, i changed the defualt location and unchecked "create directory". Added master page, wanted to change it but got a msg that c\:document and settings\<my computer name>\local setting\application data\temporary projects\<my project name/folde> does not exist or access denied.

I checked that folder and there was nothing under the temporary projects. But, if I change the defualt location and check "create directory", everything will be fine. 

With the second method, i get "c:\projects\myappname\myappname"  but I just want "c:\projects\myappname". To get the latter, i tried the "uncheck" which apparently doesnt work.

when u create a new project, automatically visual studio .net will create a virtual folder in C:\inetput\wwwrooot\ and in my projects folder in my documents where the Solution file will exists, that is why ucant change the location of the application because the VS doesnt realize that its a virtual folder. in order to be able to change the directory you have to go to the IIS and create from the newly create folder application a virtual folder.

If I created a "website project", I can change the location easily...no errors...

that error happens when I created "web application project"..so you mean i should first create a virtual directory??

By the way, hope all is fine in Lebanon, and Happy ramadan (only 2 more weeks left) 

yes, go to iis and create a virtual directory for the projects outside the default root

lebanon is fine now thank god after a long war

anyway thank u for asking :)