I'm not sure exactly how you set things up, but the following worked here:
Initial setup and test:
1) Added the Application Server role to a clean Windows 2003 install (enabling FP server extensions and ASP.NET).
2) Installed VS.NET 2003.
3) Installed VBP 5.6b.
4) Opened VS.NET and created a C# ASP.NET Web App named MyWebApp.
5) Successfully built the new project in VBP via the Make VS.NET action, specifying the sln file (C:\Documents and Settings\Administrator\My Documents\Visual Studio Projects\MyWebApp\MyWebApp.sln) or project file (
http://localhost/MyWebApp/MyWebApp.csproj).
Method #1:
6) Copied the project + source code files from c:\inetpub\wwwroot\MyWebApp to c:\Projects\RootWeb\MyWebApp.
7) Deleted the VS.NET-created MyWebApp virtual directory from IIS.
8) Created a virtual directory MyWebApp pointing to c:\Projects\RootWeb\MyWebApp (see attached project).
9) Deleted C:\Documents and Settings\Administrator\My Documents\Visual Studio Projects\MyWebApp; created a new blank solution at the same location; added c:\inetpub\wwwroot\MyWebApp\MyWebApp.csproj to the solution.
10) Repeated #5 successfully.
Method #2:
11) Deleted the MyWebApp virtual directory from IIS.
12) Created a virtual directory RootWeb pointing to c:\projects\RootWeb.
13) Manually tweaked C:\Documents and Settings\Administrator\My Documents\Visual Studio Projects\MyWebApp\MyWebApp.sln to point to
http://localhost/RootWeb/MyWebApp/MyWebApp.csproj
14) Successfully built the project in VBP via the Make VS.NET action, specifying the sln file or project file (
http://localhost/RootWeb/MyWebApp/MyWebApp.csproj).
Does that work for you?