Virtual Directory not being configured as an application in IIS

This problem most commonly arises when you open the website in Visual Studio but accidentally open the parent of the root folder. For example, imagine that you have a website located at C:\MyProjects\Website1, where the Website1 folder is the root of the website. When you open this website from Visual Studio you are asked to specify the website's root folder - it is imperative that choose the Website1 folder. If you accidentally select the MyProjects folder then the Web.config file in the Website1 folder is now in one of the website's subfolders. Because that Web.config file includes the element, among other application-level settings, you'll receive the above error.

The fix to this error (in most cases), then, is to close your project and reopen it from Visual Studio, making sure that you select the appropriate folder.

Happy Programming!

Reference: http://scottonwriting.net/sowblog/archive/2010/02/17/163375.aspx

It depends how your are running the application.

If your running it thro the temp asp.net webserver which starts when you run any application from the VS2008

or

Configure the web apps in your system IIS.

You might be getting this error because, the application need to configure in the local IIS instead of temp. asp.net web server. So move the application files into the Inetpub/wwwroot folder. And configure it as the web application before running.

Ref.

http://forums.asp.net/t/1031775.aspx <<-- try this one first

http://umbraco.org/documentation/books/install-umbraco-4-on-windows-vista/configure-iis-website

http://www.shabdar.org/virtual-directory-not-being-configured-as-an-application-in-iis.html