Try to create a new application in some other name (not webapplication1)
If not working try using web shared Folder which will not only create a virtual directory but also get configured as an application
Eg: Create a folder say C:\MyWEBApp
Right click the folder
-> select Properties
-> Select Web sharing(tab)
-> Select Share this folder(option)
-> just Press Ok button in the new window(alias:MyWEBApp)
-> Press Ok button of the properties
Now you web share is ready
-> Open visual studio New web project
-> change the name of project for
http://localhost/webapplication1
to
http://localhost/MyWEBApp
Do you get the webform1 now?
Prashant