I figured this out the other day and wanted to document it somewhere.
To create a new template, go to the TEMPLATE/1033 directory. Make a copy of one of the SPS* directories and give it a name. For this example, I'll call it SPSTSITEMPLATE. I believe it needs an SPS* name. Then you have to go to the TEMPLATE/1033/XML directory. I made a copy of the WEBTEMPSPS.xml file and called it WEBTEMPSPSTSITEMPLATE.xml and then I took out everything between the "Templates" opeing tag and the "/Templates" closing tag and added the following lines:
<Templates xmlns:ows="Microsoft SharePoint">
<Template Name="SPSTSITEMPLATE" ID="10000">
<Configuration ID="0" Title="TSI area template" Type="0" Hidden="TRUE"
ImageUrl="../images/spshome.gif" Description="This template is for new TSI pages" />
</Template>
</Templates>
Then I did an IIS reset and went to create a new subarea and it had the new template in the list. After verifying that I could create new pages with my new template, I set about customizing it. I was able, using FrontPage 2003 (my first time cracking open FrontPage ever), to make it look more the way I wanted it to look (okay, not really the way I wanted it to look, but the way the group that provides direction as to how ugly they want their site to be wants it to look).
As an aside to this, I found that changing the template changed all the pages that were derived from the template as well, which was a nice thing to discover. I know that sounds dumb, but I wasn't sure whether new pages used the template as a “template” from which they were created but after creation were independent (ie, their own file), or whether they use the template as a “source”, so changing the template would change the page.