Typically out of habit, when I create a website or web application, I set it up in it's own folder under the virtual
directory Inetpub\wwwroot. I have done this since working with .net 1.x

For example If I create a web application named PingPong, it will end up in it's own folder named
C:\Inetpub\wwwroot\PinPong

Someone told me that with .NET 2.0(VS 2005 and 2008) that it is not longer necessary to have your project
out of C:\Inetpub\wwwroot

I think my initial understanding is that C:\inetpub\wwwroot is the default virtual directory for web applications.
If you want the project to reside out of a different directory, then you have to configure that directory to
be a virtual directory by using IIS.

AppDevForMe:

Someone told me that with .NET 2.0(VS 2005 and 2008) that it is not longer necessary to have your project
out of C:\Inetpub\wwwroot

That person is right.

VS2005/2008 has an inbuilt web server so that when you run the debugger it launches the VS web server/hoster and runs your web application.

Unlike VS2002/2003 which requires you to install IIS to develop/debug web apps.